On Monday, Goldman Sachs adjusted its outlook on ON Semiconductor (NASDAQ: NASDAQ:ON), increasing the stock's price target to $92.00 from the previous $92.00, while reiterating a Buy rating. The semiconductor company reported third-quarter results for 2024 that surpassed expectations, particularly due to the strength in the China electric vehicle (EV) market and sustained demand in certain industrial sectors, such as Aerospace & Defense and utility-scale solar projects.
The firm acknowledged the uncertain timing and nature of a market recovery but expressed confidence in ON Semiconductor's potential for secular growth and margin improvement over the medium to long term. This outlook is based on the company's involvement in areas such as silicon carbide (SiC) for electric vehicles and CMOS image sensors for Advanced Driver Assistance Systems (ADAS).
Management's updated guidance suggests a reduction in long-term capital intensity to mid-single-digit percentages of revenue, a significant decrease from the previous ~11%. This adjustment is expected to enhance the company's free cash flow (FCF) margins to reach between 25-30% of revenue.
Following a period of approximately 12 months where ON Semiconductor underperformed in comparison to its peers, Goldman Sachs anticipates the stock will outperform its peer group through the remainder of 2024 and into 2025. The firm has made slight positive changes to its financial model for ON Semiconductor, which underpins the raised price target and sustained Buy rating.
InvestingPro Insights
Recent data from InvestingPro adds depth to Goldman Sachs' optimistic outlook on ON Semiconductor. The company's market capitalization stands at $31.08 billion, reflecting its significant presence in the semiconductor industry. ON's P/E ratio of 15.99 suggests a relatively moderate valuation compared to its earnings, which aligns with Goldman's view of potential growth opportunities.
InvestingPro Tips highlight ON Semiconductor's position as a "prominent player in the Semiconductors & Semiconductor Equipment industry," supporting Goldman's confidence in the company's secular growth potential. The company's strong financial health is evident from the tip indicating that "cash flows can sufficiently cover interest payments," which bodes well for its ability to invest in growth areas like silicon carbide for EVs and CMOS image sensors for ADAS.
However, investors should note that analysts anticipate a sales decline in the current year, with revenue growth at -6.63% over the last twelve months. This aligns with the uncertain market recovery timing mentioned in Goldman's analysis. Despite this, ON Semiconductor remains profitable, with a gross profit margin of 46.3% and an operating income margin of 30.22% in the last twelve months.
For readers interested in a more comprehensive analysis, InvestingPro offers 12 additional tips for ON Semiconductor, providing a deeper understanding of the company's financial position and market outlook.
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