3 Reasons to Avoid ON and 1 Stock to Buy Instead

onsemi’s stock price has taken a beating over the past six months, shedding 21% of its value and falling to $53.49 per share. This may have investors wondering how to approach the situation.

Is there a buying opportunity in onsemi, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is onsemi Not Exciting?

Even though the stock has become cheaper, we're cautious about onsemi. Here are three reasons why ON doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, onsemi grew its sales at a sluggish 4.3% compounded annual growth rate. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. Revenue Projections Show Stormy Skies Ahead

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect onsemi’s revenue to drop by 10.2%, close to its 4.3% annualized growth for the past five years. This projection is underwhelming and indicates its newer products and services will not lead to better top-line performance yet.

3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

onsemi has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 13.4%, subpar for a semiconductor business. The divergence from its good operating margin stems from its capital-intensive business model, which requires onsemi to make large cash investments in working capital and capital expenditures.

Final Judgment

onsemi isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 19.7× forward P/E (or $53.49 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.

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