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    2025-12-29

    Investment Idea: ON Semiconductor

    💡 Investment Idea: ON Semiconductor (ON)

    1. The Hook (Why now?)

    SiC Dominance at a Discount: The EV slowdown fear has crushed the stock, compressing the multiple to ~15x earnings. This ignores the reality: Silicon Carbide (SiC) is the future of power electronics, not just for cars but for AI data centers and solar inverters. ON Semi has the vertical integration (boule to chip) to dominate this transition. We are buying a secular growth leader at a cyclical trough valuation.

    2. The Thesis (The "Why")

    Point 1: Vertically Integrated SiC

    Unlike competitors who rely on third-party wafers (Wolfspeed), ON manufactures its own substrates. This yields better cost control and supply assurance—critical for Tier 1 auto OEMs like VW, Hyundai, and BMW who have signed long-term supply agreements (LTSAs). This vertical moat allows ON to capture more margin across the value chain.

    Point 2: Diversification into Industrial/Energy

    While "Auto" is the headline, the "Industrial" segment (Energy infrastructure, EV charging, Factory automation) creates a balanced revenue mix. As grid modernization accelerates to support AI power loads, ON's power modules are essential components.

    Point 3: The "Fab Right" Strategy

    CEO Hassane El-Khoury has transformed the company by shedding low-margin legacy commodity businesses and focusing on high-margin "Intelligent Power." This structural improvement in Gross Margins (targeting 53% long term) keeps profitability robust even during cyclical revenue dips.

    3. The Evidence (Data & Charts)

    • SiC Revenue: Projected to grow 2x rate of the market.
    • LTSAs: Billions in committed revenue from automotive OEMs reduces forward visibility risk.
    • Valuation: Forward P/E of <15x is historically low for a company with this margin profile and growth runway.
    • Margins: Resilient gross margins despite utilization headwinds prove the "Fab Right" structural changes are working.

    4. The Risks (Pre-Mortem)

    • EV Winter: If global EV adoption flatlines or reverses due to interest rates/politics, the SiC capacity expansion becomes a margin-killing overhead.
    • Chinese Competition: Domestic Chinese players are aggressively building trailing-edge and power capacities. They could commoditize the lower end of the market.
    • Tesla Over-dependence: Tesla is a massive customer. Their pivot to reduce SiC content by 75% in next-gen vehicles (announced Investor Day 2023) poses a volume risk, though likely overstated.

    5. Action Plan

    • Entry Price: $65 - $70.
    • Target Price: $100 (Return to mean valuation).
    • Stop Loss: $60 (Cyclical low breakdown).

    📝 Research Log

    • [2025-12-29]: Initial deep dive generated.
    • Key Insight: Focus on the "Industrial" segment as the sleeper growth driver; AI data centers need massive power regulation, which ON provides.