onsemi: Powering the Intelligent Future

onsemi (formerly ON Semiconductor) is a global semiconductor company that has undergone a significant strategic transformation. Once a broad-based supplier of commodity chips, the company has pivoted to become a leader in intelligent power and sensing technologies. This strategic shift focuses on two of the fastest-growing and most durable secular megatrends: vehicle electrification (EVs) and renewable energy. onsemi provides the critical components that enable efficient energy conversion, management, and sensing in these applications. This transformation, combined with a "fab-right" manufacturing strategy to improve cost structure, has fundamentally reshaped the company's growth and profitability profile.

Core Strategy: Megatrends & Manufacturing

onsemi's turnaround and future growth are built on a clear and disciplined strategy:

  • Focus on Automotive & Industrial: Deliberately shifting its portfolio to serve the automotive and industrial end markets, which now represent over 80% of revenue and benefit from long-term secular growth trends.
  • Leadership in Intelligent Power & Sensing: Specializing in high-value technologies like Silicon Carbide (SiC) for EVs, power management ICs, and advanced image sensors for autonomous driving.
  • "Fab-Right" Manufacturing: Optimizing its manufacturing footprint by divesting non-core fabs, consolidating production, and transitioning to more cost-effective 300mm wafers.
  • Vertical Integration in Silicon Carbide: Owning the entire SiC supply chain, from raw material (boule growth) to finished chips, providing a significant cost and supply assurance advantage.

Target End Market Mix

80%+ Automotive & Industrial

The successful pivot to these high-growth, higher-margin markets has been the cornerstone of onsemi's transformation, driving significant margin expansion.

How onsemi Makes Money: Three Technology Groups

onsemi's business is organized into three specialized groups that align with its strategy of providing intelligent power and sensing solutions. The company's revenue is increasingly concentrated in the high-growth automotive and industrial sectors, where its technology enables key functionalities like power efficiency in electric vehicles and advanced safety systems.

Power Solutions Group (PSG) (~52% of Revenue)

This is onsemi's largest and most important segment, at the heart of its pivot to electrification. PSG provides a wide portfolio of analog, discrete, and module semiconductor products that perform power conversion, regulation, and protection functions. Its most critical and fastest-growing products are those based on Silicon Carbide (SiC), which are essential for high-voltage applications like EV traction inverters.

  • Key Technology: Silicon Carbide (SiC) and Insulated Gate Bipolar Transistors (IGBTs).
  • Applications: EV traction inverters, on-board chargers, solar inverters, and energy storage systems.
  • Strategic Importance: Leader in SiC, the key enabling technology for EV efficiency.

Financial Deep Dive

onsemi's strategic transformation has had a dramatic impact on its financial results. The pivot to higher-value products in the automotive and industrial markets has driven significant gross margin expansion. The company is currently navigating a cyclical downturn, particularly softness in the mass-market industrial space, but its long-term financial targets remain focused on driving superior margins and free cash flow.

Fiscal Year Trends (2021-2024)

Quarterly Trends (Recent 8 Qtrs)

Financials clearly show the margin expansion story from the strategic pivot, followed by a cyclical revenue decline in 2024 due to broad inventory correction.

Competitive Moat: The Silicon Carbide Leader

onsemi's competitive moat is strengthening as it executes its transformation. It is built on a foundation of deep technical expertise in mission-critical applications, a sticky customer base in the automotive and industrial sectors, and a key strategic advantage in the production of Silicon Carbide.

Key Moats

  • ➔ Vertical Integration in Silicon Carbide (SiC): By acquiring GT Advanced Technologies, onsemi controls its entire SiC supply chain from raw material to finished chip. This provides a significant cost advantage and, crucially, supply assurance for automotive customers who require long-term supply reliability.
  • ➔ Technical Leadership & Design Wins: The company is a recognized leader in automotive power and sensing. Long-term supply agreements and deep design-in relationships with major automakers and Tier 1 suppliers create high switching costs.
  • ➔ Sticky Automotive & Industrial Customer Base: These markets are characterized by long product lifecycles and stringent qualification requirements, making it difficult for competitors to displace an incumbent supplier once designed into a platform.

Primary Competitors

  • ● Infineon Technologies (IFX): A major competitor across automotive and industrial power semiconductors.
  • ● STMicroelectronics (STM): A key competitor in SiC technology, microcontrollers, and image sensors.
  • ● Wolfspeed (WOLF): A pure-play competitor focused primarily on Silicon Carbide materials and devices.
  • ● Texas Instruments (TXN) & NXP Semiconductors (NXPI): Broad-based competitors in the automotive and industrial semiconductor markets.

Strategic Outlook: Risks & Rewards

onsemi has successfully executed a difficult strategic pivot, positioning the company to capitalize on powerful secular growth trends. The primary risks involve the cyclicality of the semiconductor industry and the high level of execution required to complete its manufacturing transformation.

Rewards & Opportunities 🚀

  • Secular Growth in EVs and Energy: Directly exposed to the long-term, high-growth markets of vehicle electrification and renewable energy infrastructure.
  • Leadership in Silicon Carbide: Strong market position and vertical integration in SiC, the key technology for EV efficiency, provides a multi-year growth runway.
  • Durable Margin Expansion: The shift to higher-value products and a more efficient manufacturing footprint should support structurally higher gross margins through the cycle.
  • Strong Free Cash Flow Generation: The company is positioned to generate significant free cash flow once it moves past the peak of its current capital investment cycle.

Risks & Challenges 📉

  • Semiconductor Cyclicality: The business is subject to the inventory cycles of the semiconductor industry. The current downturn in industrial and automotive demand is impacting short-term results.
  • Execution Risk: The "fab-right" strategy and the ramp-up of 300mm and SiC production are complex and capital-intensive. Any delays or missteps could impact profitability.
  • Customer & End Market Concentration: Increased reliance on the automotive market, while strategic, also increases concentration risk if that sector experiences a prolonged downturn.
  • Intense Competition: The attractive SiC and automotive semiconductor markets are drawing heavy investment from large, well-capitalized competitors.