What They Do
ON Semiconductor designs and manufactures power management semiconductors that control electrical energy flow in cars, industrial equipment, and data centers. They solve the critical challenge of making electronic systems more energy-efficient and reliable, selling chips to automotive OEMs for electric vehicles, industrial manufacturers for automation equipment, and tech giants for AI data centers. The company generates revenue by developing specialized semiconductor solutions that their customers integrate into everything from Tesla battery systems to ChatGPT's server infrastructure.
Investment Thesis
**AI data center goldmine** — Built AI business from zero to $250M+ in 2025 with high-teens growth expected, positioning across entire power conversion chain from utility-scale to chip-level**Automotive recovery underway** — Inventory digestion largely complete with stabilization evident, sitting on >$400M design funnel for next-gen zonal architecture including SmartFETs and Ethernet transceivers **Margin expansion runway** — Operating at only 68% manufacturing utilization with FabRite optimization reducing 2026 depreciation by $45-50M, creating clear path to margin recovery as demand returnsKey Risks
**Cyclical semiconductor exposure** — Revenue declined from peak levels with company exiting $300M of volatile non-core business, vulnerable to continued end-market weakness**Manufacturing underutilization** — Currently absorbing ~700 basis points of underutilization charges with low factory loading pressuring near-term profitabilityGrowth Story
Revenue is stabilizing after cyclical downturn, with core business showing above-seasonal growth trends when excluding $300M non-core exits through 2026. The company expects 4.7% revenue growth in 2026 to $6.3B, accelerating to $6.9B in 2027 as automotive markets fully recover and AI data center business scales. Key growth drivers include explosive AI infrastructure demand, automotive electrification with expanding per-vehicle content, and new GaN technology platform with >$1B design funnel.
Profitability Profile
Strong margin profile with 38.4% gross margins and record 24% free cash flow margins ($1.4B) despite cyclical headwinds. Currently experiencing margin pressure from low 68% factory utilization, but management expects expansion through 2026 as volumes recover and FabRite manufacturing optimization delivers $45-50M depreciation savings. The company maintains healthy 19.8% operating margins while returning 100% of free cash flow to shareholders via buybacks.
Competitive Position
ON holds differentiated position as one of few companies spanning entire power conversion spectrum from high-voltage 1,200V devices to low-voltage power management, particularly strong in automotive and AI data centers. Key advantage lies in Treo platform momentum with doubled product sampling year-over-year and comprehensive GaN roadmap launching 30+ new devices in 2026. Competes with Infineon, STMicroelectronics, and Wolfspeed but maintains technology leadership in power efficiency solutions.
Recent Momentum
Q4 2025 delivered in-line $1.53B revenue with first year-over-year industrial growth after eight consecutive quarters of declines, signaling cyclical recovery. Automotive business showed stabilization with modest sequential growth, while AI data center exceeded expectations. Management guidance suggests Q1 2026 revenue above seasonal trends when excluding non-core exits, indicating underlying business strength despite headline softness.
What Wall Street Thinks
Analysts project modest 2026 growth acceleration with EPS expanding from $2.92 to $4.02 in 2027 as operating leverage kicks in. Recent earnings beats averaging $0.03 per share demonstrate execution consistency, though revenue performance mixed with slight Q4 miss. Street debate centers on timing of automotive recovery and sustainability of AI data center growth rates given rapid 2025 expansion.
The Bottom Line
ON is a cyclical semiconductor play positioned at the intersection of two massive secular trends—automotive electrification and AI infrastructure—with strong technology differentiation and clear margin expansion runway as manufacturing utilization recovers.
