ON Q2 Deep Dive: Market Reacts to Weak Margins Despite Automotive and AI Data Center Momentum

Analog chips maker onsemi (NASDAQ:ON) reported Q2 CY2025 results topping the market’s revenue expectations, but sales fell by 15.4% year on year to $1.47 billion. Guidance for next quarter’s revenue was better than expected at $1.52 billion at the midpoint, 1.3% above analysts’ estimates. Its non-GAAP profit of $0.53 per share was in line with analysts’ consensus estimates.

Is now the time to buy ON? Find out in our full research report (it’s free).

StockStory’s Take

onsemi’s second quarter was marked by a negative market reaction, reflecting investor concerns over operational execution and profitability trends. Management cited ongoing softness in Europe and North America automotive markets and highlighted the impact of portfolio rationalization and segment repositioning as key factors behind the year-over-year revenue decline. CEO Hassane El-Khoury described demand as stabilizing yet cautioned that “customers are being cautious,” and noted that the company’s structural changes, including workforce restructuring and manufacturing capacity reduction, are intended to create a more resilient business model.

Looking ahead, onsemi’s guidance for the next quarter is underpinned by expectations for growth in automotive—primarily driven by electric vehicle ramps in China—and continued strength in AI data center products. Management emphasized the gradual benefits from cost discipline and portfolio shifts, with CFO Thad Trent pointing out, “utilization is the #1 driver” for future margin improvement. However, management also acknowledged uncertainty in the pace of recovery due to ongoing headwinds in industrial and legacy segments, and the timing of demand normalization across key markets.

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to demand stabilization in core markets, the early benefits of restructuring, and progress in strategic growth segments such as electric vehicles and AI data centers.

• Automotive China outperforms: Significant growth in China’s electric vehicle segment offset ongoing weakness in North America and Europe, with management citing expanded collaborations and strong customer engagement as central to this outperformance.
• AI data center traction: Revenue from the AI data center segment nearly doubled year-over-year, driven by onsemi’s intelligent power semiconductors and partnerships with major technology firms, including NVIDIA, to support next-generation architectures.
• Portfolio repositioning underway: The company continued to exit non-core and lower-margin businesses, including legacy imaging and other segments, to focus on higher-value offerings such as advanced sensing and power technologies.
• Manufacturing and workforce changes: The “Fab Right” initiative and workforce restructuring began yielding lower operating expenses, but underutilization of manufacturing capacity remains a headwind for margins in the near term.
• Treo platform momentum: The Treo product line, which integrates high and low voltage domains in a modular design, saw its design funnel more than double quarter-over-quarter, with over 5 million units shipped so far this year from the East Fishkill facility.

Drivers of Future Performance

Management expects moderate growth in automotive and AI data center segments to drive near-term performance, while portfolio exits and utilization rates remain key margin levers.

• Automotive recovery led by China: Management anticipates continued growth in China’s electric vehicle market, supported by new product ramps and deeper customer partnerships, while Europe and North America are expected to recover more gradually due to end-market uncertainty and inventory adjustments.
• AI data center and new product adoption: Ongoing investments in intelligent power technologies are expected to expand addressable opportunities in AI infrastructure, with product qualification cycles typically spanning 12 to 18 months before scaling production.
• Portfolio rationalization risks: The exit from legacy and non-core businesses is expected to reduce overall revenue by about 5% in the next year, with management acknowledging that the pace of these exits and the adoption of new, higher-margin products will affect the speed of margin recovery.

Catalysts in Upcoming Quarters

Our analyst team will be closely watching (1) whether automotive demand in North America and Europe stabilizes or continues to lag, (2) the pace of margin improvement as manufacturing utilization increases and portfolio exits conclude, and (3) adoption milestones for new intelligent power and sensing products, especially in AI data centers and electric vehicles. Execution on the Treo platform and further progress in China’s electric vehicle market will also be key signposts.

onsemi currently trades at $49.75, down from $56.84 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free).

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