Sunday, 5 November 2023
by Rose White
Shares in ON Semiconductor (NASDAQ: ON) declined by a whopping 32.6% in October, according to data provided by S&P Global Market Intelligence. The move comes due to the deterioration in its end markets, confirmed by the company’s third-quarter earnings report released toward the end of the month.
Chipmakers are known to be, and always will be, companies with highly cyclical earnings. As the economy grows, demand for chips grows, and they typically ramp capital spending as chip prices rise and profits boom. On the other hand, when its customers see a slowdown in their sales, the first thing they do is stop ordering chips as they scale back production, leaving chipmakers carrying too much capacity.
The latter dynamics can be seen in CEO Hassane El-Khoury’s commentary on the earnings call. He lauded the completion of an expansion of the world’s largest silicon carbide fabrication facility in Bucheon, South Korea.
Going on to say, “Our manufacturing output continues to exceed expectations, and the acceleration of our ramp resulted in achieving a $1 billion run rate quarter in Q3, increasing nearly 50% over Q2.” In other words, ON Semiconductor hit an annualized rate of $1 billion in production of silicon carbide chips in the third quarter.
In the following sentence, he noted that “for the full year, a single automotive OEM’s [original equipment manufacturer] recent reduction in demand will impact our $1 billion target, and we now expect to ship more than $800 million of silicon carbide in 2023.” As such, CFO Thad Trent sees a mid-single-digit decline in the company’s automotive-related sales in the fourth quarter, and management is planning to reduce its factory utilization in the coming quarters.
As a reminder, the company’s management is focusing on the desirable markets of electric vehicles (EVs) and industrials, where its sensors and intelligent power solutions have materially more content than in legacy markets.
It’s a compelling strategy, not least, as both industries have strong secular growth drivers. Long-term demand for EVs and automation in manufacturing looks secure. However, ON Semiconductor’s sales are still the spending plans of their customers, and when the latter see a cyclical slowdown coming, they will pare back production.
That said, it was interesting to hear El-Khoury say the “majority of the weakness in Q4 is the silicon carbide, obviously. But the rest of the business is kind of exactly where we expected it at the end of the year.”
In other words, it primarily comes down to one customer referred to earlier. Whether that will spill over to other customers making cutbacks is unclear, but there’s little doubt EV spending is set for long-term growth. As such, ON Semiconductor stock will suit enterprising investors looking to buy on a dip.
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