The market warmed to ON Semiconductor’s (NASDAQ: ON) second-quarter earnings report, and the stock has now significantly outperformed Nvidia over the last month, with a 14.2% increase compared to a 5.4% decline for the stock market darling (as of this writing). The question is why and whether it can continue.
A cyclical stock to buy
ON Semiconductor services two highly cyclical end markets, namely automotive (electric vehicles, power management, advanced driver assistance systems, etc.) and industrial (automation, EV infrastructure, machine vision, etc.), which are declining this year for various reasons.
The chart below shows the sequential revenue decline trend established since the third quarter of 2023. Moreover, management expects the year-over-year declines to continue in the third quarter, with guidance for revenue of $1.7 billion to $1.8 billion, compared unfavorably with the $2.18 billion reported in the third quarter of 2023.
However, in a sign of stabilization, the midpoint of the third quarter guidance implies a sequential increase in revenue from the $1.74 billion just reported in the second quarter. This is just one of the reasons why investors bought the stock after the recent results. In other words, they are looking at the forecast for sequential improvement and taking it as a potential bottoming process in action.
Data source: ON Semiconductor presentations. Chart by author.
It’s an intriguing viewpoint, especially since semiconductor stocks are considered highly cyclical. The optimal time to buy is often during their darkest hour before the light of recovery appears. That sort of argument is why ON Semiconductor can outperform Nvidia. Given the surging interest and investment in AI applications driving demand for high-performance computing (HPC) chips, the latter is already firing on all cylinders.
Is ON Semiconductor on the path to recovery?
The critical question here is not only whether a recovery is coming, but also what kind of recovery it will be. While investors typically look for a V-shaped recovery, ON Semiconductor’s CEO, Hassane El-Khoury,…
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