3 Reasons to Buy ON Semiconductor Shares Like There’s No Tomorrow

One of the biggest complaints from growth investors is the need for more growth stock candidates at reasonable valuations. That rarely happens when a company is firing on all cylinders.

Still, you you can often buy shares at a reasonable valuation when the market no longer likes them due to temporary weakness in target markets. This seems to be the case NA Semiconductor (NASDAQ: ON). The stock deserves a closer look from growth investors, and here are three reasons why.

Long-term growth story

The investment case for the stock is based on management’s shift toward automotive and industrial markets. ON Semiconductor’s smart technology is used in electric vehicles (EVs) and hybrid electric vehicles (HEVs) and helps reduce their weight, extend their operating time and speed up charging.

Meanwhile, the company’s advanced sensor technologies are essential for smart factories and facilities. They are also used in the automotive industry for advanced driver assistance systems (ADAS) and automated driving systems. Management continues to position the company for long-term growth in these end markets.

The slowdown is temporary

It’s safe to say that none of these end markets are in good shape in 2024 — at least not relative to expectations for that year. Relatively high interest rates have slowed electric vehicle sales, and automakers have cut development spending. A similar situation is playing out in the industrial sector, where there’s been a notable slowdown in orders for industrial automation.

The chart below illustrates the nature of the decline in the major industrial and automotive markets.

Data source: ON Semiconductor.

That said, the reasons for the revenue decline appear to be temporary and related to the high-interest-rate market. With lower interest rates coming, EV/HEV sales should increase, leading to an influx of investment into the growing manufacturing industry. In a demonstration of the automotive industry’s commitment to investing in EVs, ON Semiconductor recently signed a multi-year agreement with Volkswagen be the main supplier of power-box solutions.

In addition, there has been a slowdown in spending on factory automation, as evidenced by the ordering patterns of companies at risk, such as Emerson Electric AND Rockwell AutomationThis combination of slowing growth and programmatic distributors selling off inventory rather than placing new orders appears to be temporary.

There’s a reason why companies like Emerson Electric, SiemensAND Honey make automation a key part of their growth plans. Factory automation allows developed countries to compete on costs with low-cost manufacturing countries.

Image source: Getty Images.

Attractive pricing

There’s no avoiding the problem: ON Semiconductor’s sales are declining and are expected to fall in 2024. What’s more, CEO Hassane El-Khoury talks about an “L-shaped” recovery, meaning the sharp decline will be followed by a slow and gradual recovery.

The good news is that the conservative approach has been factored into the stock valuation.

To pinpoint an attractive valuation for the company, let’s look at the standard valuation multiples using Wall Street analyst consensus. These are excellent multiples for growth stocks hitting a revenue and earnings trough in 2024, meaning the market is not be careful in the Wall Street consensus. In the latter case, EV is enterprise value (market capitalization plus net debt) divided by earnings before interest, taxes, depreciation, and amortization (EBITDA).

Data source: marketscreener.com, author’s analysis.

The market has reason to doubt the numbers. No one can feel completely comfortable with a company with falling sales, but if the market is wrong, then the growth potential is significant.

Stocks to buy?

Let’s say you believe the future of the automotive sector lies in EVs/HEVs, ADAS, and automated driving systems, rather than traditional internal combustion engines (ICEs), then you might believe that ON Semiconductor has a bright future — not least because it generates significantly more content per vehicle in EVs than in ICEs.

Image source: Getty Images.

Additionally, the stock will be attractive if you like the megatrend of factory automation, renewable energy and electric vehicle charging networks.

These industries won’t recover quickly. Still, the fundamental drivers—clean energy (electric vehicles, etc.) and increased manufacturing efficiency through investments in automation—are in place.

Is it worth investing $1000 in ON Semiconductor now?

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Emerson Electric and Volkswagen. The Motley Fool recommends ON Semiconductor and Volkswagen Ag. The Motley Fool has a disclosure policy.