Morgan Stanley cuts ON Semiconductor to Underweight: Should you sell?


ON Semiconductor Corp (NASDAQ: ON) finds itself in the spotlight today after Morgan Stanley downgraded its rating to Underweight from Equal-Weight and reduced the price target from $70 to $65.

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This move by Morgan Stanley primarily stems from concerns regarding the company’s exposure to the automotive industry, particularly in areas like silicon carbide and image sensors. The firm notes that, given the current industry dynamics, there is “limited room” for ON Semiconductor’s valuation multiples to expand.

This downgrade follows a broader trend observed within the semiconductor industry, especially in the analog segment where companies are trading at a significant premium.

Morgan Stanley analyst Joseph Moore highlighted that the broader analog segment of the semiconductor market is unlikely to see a “standout name” in the current upcycle

Despite this downgrade, not all analysts are bearish. Wells Fargo recently spotlighted ON Semiconductor by adding it to its Q3 Tactical Idea list for 2024, citing the company as nearing an inflection point in revenue and earnings growth with a compelling valuation.

Analyst Gary Mobley maintains an ‘Overweight’ rating with a price target of $95, contrasting sharply with Morgan Stanley’s perspective. This divergence in analyst opinions presents a complex picture for investors trying to gauge the company’s future trajectory.

ON Semiconductor’s strategic manoeuvres

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Recent strategic moves by ON Semiconductor, like the acquisition of SWIR Vision Systems, indicate a push towards diversifying and strengthening its portfolio, even though this particular acquisition isn’t expected to impact financial outlooks significantly in the near to mid-term.

More substantial is the company’s ambitious investment of up to $2 billion in a new chip facility in the Czech Republic, aimed at bolstering its silicon carbide manufacturing capabilities.

This expansion is part of a strategic push to enhance the company’s presence in Europe and support growing demands in electric vehicles, renewable energy, and AI data centers, marking a significant step in its long-term growth strategy.

Financially, ON Semiconductor has shown resilience and strategic foresight. Despite facing an industry-wide challenge of high inventory levels the company has managed to maintain relatively healthy gross margins due to better inventory management compared to its peers.

Earnings & valuation

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Recent quarterly results beat expectations with non-GAAP EPS of $1.08, slightly above the consensus.

However, analysts like Tristan Gerra from Baird maintain a neutral rating on the stock with a price target of $60, citing concerns over future demand and inventory adjustments.

Looking ahead, the second quarter earnings are anticipated to be a mixed bag. While the company has seen several downward revisions in earnings expectations—with EPS GAAP estimated at $0.88—there remains a cautious optimism that ON Semiconductor could continue its trend of modest quarterly revenue beats.

In terms of valuation, ON Semiconductor is viewed by some analysts as undervalued, with potential long-term growth due to its strategic investments in high-demand sectors like silicon carbide for automotive applications and power semiconductors for renewable energy solutions.

The diverse opinions and data points from various analysts offer a complex yet intriguing picture, indicating that ON Semiconductor is at a critical juncture.

This mixed fundamental backdrop sets the stage for a deeper exploration of ON Semiconductor’s stock.

Now, let’s turn our attention to what the charts have to say about the stock’s price trajectory, examining the technical indicators and market sentiments that could influence its near-term movements.

Targeting resistance at $77.8

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ON’s stock has seen a rapid decline since July last year when it was trading above $110. In the last one year, the stock has lost more than 20% of its value.

ON chart by TradingView

Although the stock continues to remain bearish in the medium term and trades below its 100-day and 200-day moving average, it is displaying bullish momentum in the short-term charts. It has appreciated over 25% since its April lows under $60.

Investors who are bullish on the stock going into earnings can buy it at current levels while keeping a stop loss a few cents below its recent swing low at $66.76.

If the short-term bullish momentum prevails and the stock manages to cross above its near-term resistance at $77.8, it can reach $90 levels again, where one can consider booking profits.

Since the stock continues to remain in a medium-term downtrend, traders bearish on the stock can consider a short position near $80 with a stop loss at $85.18. If the medium-term trend prevails over the short-term, the stock can again fall to $60 levels where one can book profits.

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