In this piece, I evaluated two semiconductor stocks, Analog Devices (NASDAQ:ADI) and ON Semiconductor Corp (NASDAQ:ON), using TipRanks’ comparison tool to determine which is better. Analog specializes in data conversion, signal processing, and power management technology. Meanwhile, ON Semiconductor, which brands itself as “onsemi,” focuses on energy-efficient solutions for automotive, industrial, 5G and cloud power, medical, and aerospace & defense applications.
Shares of Analog Devices are up 12% year-to-date, extending their 12-month gain to 22%, while onsemi stock has soared 61% year-to-date, bringing its one-year gain to 47%.
With such a dramatic difference in the sizes of their year-to-date rallies, it may come as a surprise that Analog and onsemi are trading at somewhat similar valuations. Since both companies are profitable, we’ll compare their price-to-earnings (P/E) ratios, gauging them both against the valuation of their industry to try to determine what they might be worth. For comparison, the U.S. semiconductor industry is currently trading at a P/E of 52.8, much higher than its three-year average of 30.6.
Analog Devices (NASDAQ:ADI)
At a P/E of 24.6, Analog Devices immediately looks discounted relative to its industry, on both a current and historical basis, especially considering that its five-year mean P/E is 36.2. However, the company posted a slight miss on its last earnings report toward the end of August. While its stock has ticked slightly higher since that disappointment, Analog’s valuation remains depressed despite its positive long-term trends, making a bullish view seem appropriate.
Notably, Analog Devices is up more than 100% over the last five years and more than 258,000% since its 1969 initial public offering (IPO), and a closer look at its fundamentals reveals why. The company has been generating solid growth, with revenue rising by 30.6% in 2021 and 64% in 2022.
Analog’s gross margin has been stable in the mid-60% range over the last several years. While its net income margin has been consistently in the low-20% range over the last several years, it did fall to 19% in 2021 before recovering to 23% in 2022 and then 29% for the last 12 months.
Finally, Analog Devices pays a solid dividend yield of 1.78%. In fact, it has raised its dividend annually for at least the last 19 years, making it a solid addition to a dividend portfolio, especially considering that most technology companies do not pay dividends.
What is the Price Target for ADI Stock?
Analog Devices has a Moderate Buy consensus rating based on 11 Buys, five Holds, and zero Sell ratings assigned over the last three months. At $199.71, the average Analog Devices stock price target implies upside potential of 9.6%.
ON Semiconductor (NASDAQ:ON)
At a P/E of 22.3, onsemi looks even more discounted relative to its industry than Analog Devices. However, that slight discount to Analog Devices may be warranted, as its long-term fundamentals aren’t quite as strong. Thus, a neutral view seems appropriate, at least for now.
For reference, Onsemi’s revenue grew by 28% in 2021 and 24% in 2022. Meanwhile, its gross margin has ranged from 33% to 48% over the last several years, while its net income margin has ranged from 4% to 23%.
Onsemi shares hit a record high over the summer as demand for automotive and industrial chips soared. The company beat estimates for both revenue and profits in the quarter it reported at the end of July, also issuing better-than-expected guidance for the current quarter. Onsemi has also benefited from the artificial intelligence hype, which has further boosted its shares.
While the company’s stock is up 370% over the last five years, it has only gained 350% since its IPO in 2000. A closer look at onsemi’s P/E over the last five years reveals a dramatic runup before it plunged into unprofitability in 2020, followed by a fresh surge later that year when it achieved profitability again. Since November 2020, onsemi’s P/E has gradually stabilized in the upper-teens-to-lower-20s range.
What is the Price Target for ON Stock?
ON Semiconductor has a Moderate Buy consensus rating based on 17 Buys, seven Holds, and zero Sell ratings assigned over the last three months. At $119.27, the average ON Semiconductor stock price target implies upside potential of 19.9%.
Conclusion: Long-Term Bullish on ADI, Neutral on ON
Both Analog Devices and ON Semiconductors look like solid long-term plays in different areas of the semiconductor industry, so arguably, both could be worth holding. However, at current valuations, Analog looks like the one that may be worth buying, while a wait-and-see approach might be more appropriate for onsemi, pending a more attractive entry point.