Three Factors Behind the Expected Surge in Semiconductor Profit Growth
On Semiconductor, a power, analog, and image sensor specialist, reported earnings on October 28, leading to a curious stock reaction. Initially, the stock dipped, then soared to a 5.5% gain, only to settle at a modest 1% increase. This rollercoaster ride suggests investors are unsure about the company's prospects. However, a closer look at the situation suggests On Semiconductor's profits might surge in the coming years. Here are three reasons why you shouldn't overlook this opportunity at its current price.
1. Leaping ahead in SiC
On has made great strides in silicon carbide (SiC) chips, an innovative alloy that boosts the efficiency of power semiconductors used in electric vehicles (EVs) and industrial power infrastructure. Despite a soft auto business, On's third-quarter results showed an increase in SiC market share, especially in China, where EV adoption is booming. Moreover, the volume of EVs has not decreased due to a shift in strategy but rather due to short-term demand fluctuations. This suggests that On's SiC chips will regain momentum as the EV market recovers.
2. AI data centers are just getting started
On's non-auto segments, including industrial clean energy applications, also show promise. The company has been investing in AI data centers, where power-hungry machines need SiC chips for high-performance operations. On is now in a position to profit from the $2.2 billion AI data center market, expected to reach $4.4 billion by 2028. This represents an incremental but significant boost for On's $7.4 billion annual revenue.
3. Capital spending but soon to pay off
On's bottom line is set to increase as the auto and industrial chip markets recover, and the company is well-positioned for this turnaround. Over the past few years, On has made substantial investments to improve its manufacturing processes and capacity, including the acquisition of a factory from Globalfoundries and the conversion of its silicon wafer lines to more efficient 200mm (8-inch) wafers. These improvements in efficiency and capacity will translate into higher profitability when the markets recover.
In conclusion, On Semiconductor's strategic investments in SiC and AI data centers, along with its capital spending efficiency, indicate a promising future for the company. While the timing of the auto and industrial chip markets' recovery is uncertain, On's current valuation of just 18.5 earnings seems like a compelling opportunity for long-term investors as we await a surge in profits.
- Given On Semiconductor's strategic investments in SiC and AI data centers, which require high-performance SiC chips, this presents an excellent opportunity for long-term finance-savvy investors looking to diversify their portfolios by investing in companies that are making significant strides in the field of sustainable finance.
- With the auto and industrial chip markets expected to recover soon, and On Semiconductor having already made substantial investments in improving its manufacturing processes and capacity, smart investors looking to grow their money might consider this as a wise choice in their investing portfolio, given the potentially substantial returns on investment in the coming years.
