ON Semi Sees Utilization Cuts As EV Demand Softens, Analyst Warns

Needham analyst N. Quinn Bolton maintained ON Semiconductor ON with a Buy and lowered the price target from $87 to $66.

Bolton met with ON Semiconductor management at the annual Consumer Electronics Show last week.

Like recent quarters, end demand conditions remain muted across the company’s key industrial and automotive end markets, and inventory digestion continues.

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In the near term, turn orders have been weaker than expected, and management expects results to be below typical seasonal patterns for the first half of 2025.

Reflecting the weak demand conditions, Bolton expects management to further reduce fab utilization rates below the 65% level at which utilization ran for most of 2024.

The lower fab utilization rates will likely push adjusted gross margin below 45% in the first half of 2025.

While Bolton continues to view ON Semiconductor as a promising semiconductor cycle recovery play, the delayed industry recovery prompted Bolton to reduce his forward estimates and lower the price target.

Inventory digestion continues to be pushed out; demand remains soft. Like the last earnings call, softness has continued in the market over the past several months.

The demand environment remains muted with ongoing inventory digestion and slow end-market demand.

Further, ON Semiconductor’s turns business has slowed significantly over the last 30-40 days, and visibility is a quarter at best. Slowing EV sell-through is weighing on auto demand.

Industrial has yet to broadly recover except for pockets of strength in utility-scale solar and A&D.

Regionally, China and Japan are recovering with strength in BEVs, but North America and the European Union remain soft in both automotive and industrial.

Management expects revenue to be “sub-seasonal” for the next couple of quarters and is not planning for an industry recovery in 2025.

Slowing turns business is leading to lower utilization.

Management noted it plans to lower utilization rates in the near term (~65% last quarter), contrary to the last earnings call, when it planned to keep utilization flat, driven by the increased weakness in the turn business seen in the last 30-40 days.

Management noted that if utilization ticks below 65%, the margin will likely sink below 45%.

However, once demand picks back up and utilization ramps back up, management believes it can quickly turn back on utilization and see a gross margin benefit.

Full utilization is around 83%- 85%. Each point of utilization equates to ~ a 15-20bps impact on gross margin. It expects superior tech will win in China regardless of government suggestions.

Management was clear that Chinese EV companies continue to use the company’s technology, and ON Semiconductor is winning a share within SiC despite the government’s recommendation to use domestic chips.

Management noted there is no viable local supplier of SiC devices and that Chinese EV companies continue to choose ON Semiconductor due to the best performance despite the fact that the devices and a majority of the SiC substrates are manufactured in the U.S.

Bolton projected fourth-quarter revenue of $1.72 billion (prior $1.76 billion) and adjusted EPS of $0.93 (prior $0.98).

Price Action: ON stock is up 3.13% at $55.63 at last check Monday.

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