Semiconductor giant Onsemi (NASDAQ: ON) recently reported strong Q4 results, with revenues, margins and earnings per share coming above Street expectations. Solid demand for its products in the automobile and industrial end markets was the primary top-line driver.
A buoyant outlook for 1Q22 also boosted investor confidence, making the ON stock price rise up by 9% during trading hours on the following day.
Expert Scrutinizes Earnings Commentary
After the print, J.P. Morgan analyst Harlan Sur further analyzed the company’s earnings commentary and its developments. One of the most important things that he noted was the sustained demand that is expected to continue into 2023. Sur said, “given the strengthening of end demand and continued supply constraints (lead times continue to remain elevated at ~45-47 weeks), the team is fully booked for 2022 and now sees demand outpacing supply growth through 2022 and extending into 2023 (vs prior view of persisting through most of 2022)”.
The analyst was also encouraged by a meaningful expansion in the design win pipeline in the power and auto imaging industries. He also cited an example validating the same, saying that Onsemi raised its “customer revenue commitment for silicon carbide to $2.6 billion through 2024 (up from $2 billion).”
Interestingly, Onsemi’s gross and operating margins of 45.2% and 28.6% exceeded the long-term target that the company had set for itself recently. Moreover, management noted that continued initiatives to reduce costs and optimize product mix are on the horizon, leading the company to revise the long-term gross margin outlook to 48%-50% from 45%, and operating margin outlook to 31%-33% from 28%.
The analyst’s only concern is the continued decamping of lower margin businesses, which, again, is expected to be overshadowed by solid growth in core businesses (due to the product mix optimization discussed earlier), and to be better for the business in the long haul.
Sur was upbeat about Onsemi’s prospects, and reiterated a Buy rating on the stock. The analyst increased the price target to $71 from $60. He supported his stance by saying, “Longer-term, we believe ON’s leadership position in image sensors and power/analog products, combined with the content gains and new design wins will continue to benefit the company”.
Wall Street’s Take
Wall Street consensus is cautiously optimistic about Onsemi, with a Moderate Buy rating based on 13 Buys, 6 Holds, and 1 Sell. The ON stock predictions point toward an average price target of $72.05.
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