Summary
ON benefits from its cost-savings initiatives and sustainable top line.
Its slowing top-line growth, on top of a potential cycle peak, implies a greater probability of profit taking at today’s price.
The management reassured that they have enough supply to service their strategic market, despite their aggressive manufacturing optimization.
ON is well-positioned to withstand volatility caused by macro headwinds and is relatively inexpensive in comparison to its peers, making it an attractive candidate for a potential pullback.
Jae Young Ju/iStock via Getty Images ON Semiconductor (NASDAQ: ON ) develops cutting-edge solutions for high-growth megatrends such as communications, automotive, and industrial. It benefits from its aggressive cost-savings initiatives and from strong capex spending outlook with growing long-term arrangement with end-consumers. ON’s strategy to reduce volatility on its margins and maximizing benefits in the event of a market downturn serves as a strong catalyst for the company.
ON currently shows a slowing revenue on top of investors’ concerns about the expected cyclical peak in 2022, which can lead to short-term uncertainties. This implies a potential short term profit taking opportunity amid the uncertainty. An analyst, on the other hand, believes that the industry is in a ” Super Cycle ,” while others say that the demand for semiconductor chips sales will be more than 3 times the rate of the global GDP.
The management assures investors that they have sufficient supply and a diverse product portfolio to meet the demand regardless of what the market will do. ON is still relatively cheap against its peers with a disciplined approach to today’s uncertainties. It is a buy on a pullback . Facing A Reasonable Concern
There are considerable speculations that we are approaching the peak of the cycle, with limited growth potential, and whether Moore’s Law is dead or still applicable. However, semiconductors are in a different era right now, where innovation is faster than it was over the last decade. With the growth of IoT and artificial intelligence, semiconductors can power up almost everything from automating cars all the way up to building vehicles that can bring us to space. In fact, Applied Materials ( AMAT ) expects that the semiconductor market will reach $1 trillion within the next decade. CEO Gary Dickerson of AMAT provided a positive outlook for its full year of 2022 in their latest earnings call, where they ended their Q1 2022 with a strong revenue and earnings per share, a surprising $110.91 million and $0.04 respectively. We expect to outperform the market again in 2022 with especially strong growth in optical wafer inspection, combined with further extension of our e-beam leadership. CFO Bob Halliday closed their call, mentioning interesting catalyst, as quoted below: Number one, demand continues to be very strong. We see our business trending up as we proceed through the year, and we believe 2023 will be even stronger. Number two, Applied’s position is very strong. I’m confident that we really make progress with our supply chain; we’ll be able to demonstrate that we are very much on track to our market share and our gross margin targets. And number three, even in this constrained environment, we’re generating record revenue and operating cash flow, which is fueling strong shareholder returns. Additionally, other companies in the industry like Analog Devices ( ADI ), Intel ( INTC ), and Advanced Micro Devices ( AMD ) projected that the demand environment will continue to be strong and expects shortages to remain until 2023. Going back to the concern, the PHLX Semiconductor Sector Index ( SOX ) , according to its past performance, tends to pullback after 2 to 3 years of rally. Today, we are on the verge of slowing down and they are expecting a decline of 4%, better than the actual decline of 8 percent in 2018. 5 Year Line Chart of SOX (Thetechnologyletter.com) On top of the projected peak, ON is currently showing a declining growth of revenue, as shown in the graph below. ON Semi’s Quarterly Revenue Trend (Data from SeekingAlpha, Prepared by InvestOhTrader) Additionally, ON’s price action showed weakness at today’s price and got rejected at the $67 zone. A breach on its 20 day simple moving average may support short-term bearish price action in the next trading week. ON Semi Weekly Chart (TradingView.com) However, before you take a short position or take profit, there are other positive catalysts about ON, which supports my bullish point of view in its long-term perspective. Reassuring Updates From the Management
1. Their disciplined approach towards a […]
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