Over the past six months, onsemi has been a great trade, beating the S&P 500 by 9.6%. Its stock price has climbed to $81.31, representing a healthy 20.7% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy onsemi, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think onsemi Will Underperform?
Despite the momentum, we’re cautious about onsemi. Here are three reasons you should be careful with ON, plus one stock we’d rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, onsemi struggled to consistently increase demand as its $6.20 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Low Gross Margin Reveals Weak Structural Profitability
In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.
onsemi’s gross margin is one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a 38.2% gross margin over the last two years. That means onsemi paid its suppliers a lot of money ($61.84 for every $100 in revenue) to run its business.
3. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Analyzing the trend in its profitability, onsemi’s operating margin decreased by 16.9 percentage points over the last five years. onsemi’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 10.8%.
Final Judgment
onsemi falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 20.2× forward P/E (or $81.31 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of onsemi
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