This is my first coverage of ON Semiconductor Corporation (ON). In this article, I will discuss the company’s business, including its ongoing transformation: a gradual shift towards higher-margin, proprietary technologies of Silicon Carbide (SiC) and Gallium Nitride (GaN) products, while exiting traditional, commoditized manufacturing services. Accompanying this transformation, I will also analyze the company’s latest financial report and discuss its current valuation. Based on the enhanced moat provided by proprietary technology, the potential for renewed future growth, and continued margin expansion, I give the company a "Strong Buy" rating.

Ongoing Transformation and Macro Picture

A trend we currently see in the hyperscale computing industry is that server racks are evolving towards higher power density. For example, NVIDIA's GB200 NVL72 platform consumes significantly more power, with individual rack power consumption often exceeding 120kW. I believe that at such power levels, traditional power distribution architectures designed for lower loads are becoming unsuitable.

At such power levels, low voltage transmission leads to significant resistive losses and excessive heat accumulation, thus necessitating an increase in voltage. For readers unfamiliar with electrical engineering, higher voltage means that with the same power transmission, proportionally lower current can be used, thereby significantly reducing resistive heat losses in copper busbars. Therefore, we are witnessing a transition in power distribution architecture towards 800V and even higher voltages. These systems can no longer efficiently use traditional silicon MOSFETs because traditional silicon devices lack efficiency at such high voltages. This is where ON Semiconductor provides a solution.

The company's SiC and GaN technologies cover different stages within the power architecture of data centers. They can be used for high-voltage AC-DC conversion in front-end power units as well as for high-frequency DC-DC intermediate bus conversion. I will not delve further into technical details here, but the core point is that the company is at the right time and right place to provide solutions for a real issue emerging in the HPC industry.

Management is betting heavily on this long-term trend. As CEO Hassane El Khoury mentioned during the Q2 2026 earnings call: "We are seeing momentum, and we are seeing strong performance. And as you said, this strength is sustainable, not just a short-term spike in one quarter. Looking ahead, as we transition to 800V DC, this will further increase our content value per unit."

Q2 Financial Report

From the Q2 financial report, if we only look at surface revenue growth, considering the strong long-term tailwinds in the industry, it is indeed not particularly exciting. However, we need to further break down these data rather than jump to conclusions too early. The company disclosed revenue of $1.6 billion, a year-on-year increase of 9%, above the midpoint of guidance. However, we must consider that the data center-related business only accounts for a portion of the company’s total revenue.

The company currently reports three main business segments: Automotive revenue of $781 million, a year-on-year increase of 7%; Industrial revenue of $423 million, a year-on-year increase of 4%; Other businesses, including AI data centers, revenue of $400 million, a year-on-year increase of 21.3%. From the revenue structure, it is evident that AI-related business currently accounts for a small portion of the company’s total revenue, while other businesses are more mature and growing at a slower pace.

I believe that the profit margin for this AI-related business is higher than that of other mature businesses, and it is also the fastest-growing segment. This essentially means that as the proportion of this business increases, the company’s overall profit margin is likely to continue to expand in the future, and the latest quarter has already reflected this trend. The company disclosed an operating profit margin of 19.5%, up from 16.5% a year ago. I will further assume in the valuation section that this trend will continue, as AI racks are utilizing higher voltage, while demand for AI data centers remains strong; both factors should drive rapid growth in the "Other" business.

Management also confirmed this trend in the conference call, stating: "We currently expect AI data center revenue to grow more than double by 2026." This likely means that revenue growth rates may accelerate again in the future and begin to affect the company's overall blended revenue growth rate. Therefore, I expect that by the end of 2026 and into 2027, the company's revenue growth rate may reach the mid-teens, around 15%.

Valuation

In this section, I will provide my view on the company’s valuation in 2027, assuming that the company can achieve renewed growth acceleration while continuing to improve margins. As mentioned earlier, the company’s operating profit margin improved by about 300 basis points year-on-year. I believe this trend is likely to continue. If so, we might see a similar level of improvement in a year. Starting from the net profit margin in Q2 2026 and adding 300 basis points, we can estimate a mid-2027 net profit margin of around 17%. It should be noted that the first quarter had a lower profit margin, mainly due to restructuring costs related to the closure of traditional wafer fabs and asset impairment. I am not overly concerned about this since it does not directly relate to the core AI-related business which is central to my investment logic.

Next, assuming annual revenue growth of 15%, while the current TTM total revenue is $6.2 billion, the total revenue may reach approximately $7.1 billion in a year. Based on the expected profit margins above, net profit will rise to around $1.2 billion.

So, what kind of valuation is reasonable? In a scenario of 15% revenue growth and continued margin expansion, I believe a GAAP P/E ratio of 25 to 30 times is reasonable. This means that by mid-2027, the company should have a reasonable market value of around $30 billion to $36 billion. Based on the current valuation of $27.6 billion, this corresponds to potential upside of about 8.7% to 30.4%. I believe this is sufficient to support a "Strong Buy" rating.

Risks and Plans

When investing in a company highly tied to capital expenditure in the data center industry, I believe the primary concern is interest rates. Current market forecasts expect about a 75% probability of interest rate hikes in 2026. If this happens, it may depress AI data center capital expenditures, thus invalidating my investment logic regarding renewed growth acceleration. However, on the other hand, limited-rate hikes may not significantly affect the still very strong AI CapEx growth of hyperscale cloud service providers. Moreover, in my view, AI is destined to have a tremendous impact on the future, and even if the Federal Reserve's policy rates rise somewhat, it is unlikely to change this long-term trend. But in the short term, it could indeed exert pressure on companies like ON Semiconductor.

After the stock price correction over the past few months, I believe now is a good time to start building a position or to further accumulate on existing positions.

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。