Onsemi Earnings: Automotive and Silicon Carbide Sales Drive Strength as Margin Headwinds Persist

We maintain our $74 per share fair value estimate for narrow-moat Onsemi ON after it reported first-quarter results and second-quarter guidance lightly above our expectations. The firm’s focus on the automotive and industrial markets continues to generate strong results, and we remain impressed by its progress ramping silicon carbide, or SiC. Onsemi is fending off several headwinds to profitability, but we think its margins are holding up quite well. Overall, we see 2023 as a transitory year with some pockets of weakness, but view Onsemi as strongly positioned for long-term profitable growth. We see shares as fairly valued.

First-quarter sales rose 1% year over year but dipped 7% sequentially to $1.96 billion. 2023 will exhibit mixed signals on the top line as Onsemi continues to exit lower-margin revenues outside of the automotive and industrial focused markets. We expect the firm to be done with this endeavor exiting 2023. Automotive sales rose 38% year over year and industrial sales 2% year over year, combining for a record 79% of sales. Management cited pockets of weakness, namely some automotive inventory digestion and consumer-facing industrial products. Still, we see broadly healthy demand driven by electric vehicles and energy infrastructure.

Margins dropped both year over year and sequentially in the quarter, but we see non-GAAP operating margin of 32% as strong. Gross margins are seeing headwinds from Onsemi’s new fab in east New York, lower factory utilization with softer demand, and its silicon carbide ramp. Given the three-pronged headwind, we see non-GAAP gross margin of 47% as solid and expect all of these headwinds to dissipate in 2024.

Second-quarter guidance calls for sequential sales growth (with a midpoint of $2.025 billion) and flat to slightly down margins. We believe auto sales will keep growing, industrial sales will remain mostly flat, and noncore sales will decline throughout 2023, netting out to a modest top-line decline.