The Value of Investing in Unloved Stocks
A principle of value investing is to find high-quality stocks that are currently overlooked by the market. But identifying such opportunities can be quite a challenge.
One sector that seems out of favor yet holds potential for recovery is the electric vehicle (EV) market. Within this space, On Semiconductor (NASDAQ: ON) has emerged as a critical player, currently available at a very appealing valuation.
Investors Should Consider On Semiconductor
On Semiconductor specializes in providing essential components for the automotive sector and stands out for its innovative silicon carbide solutions that support EVs and related infrastructure. Silicon carbide (SiC) is a unique alloy known for its production challenges but offers substantial benefits. SiC power modules occupy less space compared to traditional silicon components, enhancing their efficiency within an electric vehicle's powertrain. This leads to increased driving range and allows manufacturers to use smaller batteries, significantly reducing overall costs.
Transformative Leadership
Led by CEO Hassane El-Khoury, who took the helm in December 2020 following involvement from an activist investor, On Semiconductor has undergone a notable transformation. El-Khoury has streamlined the company by selling off some of its internal fabs and focusing on higher-margin segments, including power, analog, and sensor chips. Currently, 52% of On's revenue is derived from the automotive sector, complemented by an additional 27% from industrial applications.
Both segments are expected to benefit from long-term trends favoring electric vehicles and the electrification of energy systems. However, both areas are facing a downturn due to high-interest rates and a slowing global economy.
On's Silicon Carbide Advantage
A significant factor favoring On Semiconductor is its lead in silicon carbide manufacturing. While other entities are still working on ramping up their SiC production capabilities, On has achieved a commanding 35% to 40% market share in this space. The management aims to grow their SiC chip revenue at double the industry's growth rate. At a recent automotive conference, El-Khoury noted that 50% to 60% of new EVs showcased at the Beijing Auto Show featured On Semiconductor's SiC technology, reflecting China's robust market adoption of electric vehicles.
Full Package Solutions
On differentiates itself further by offering complete packages that include its chips, addressing the necessary compromises between chip size, type, and packaging. This full-package approach allows On to provide tailored solutions for automakers and their suppliers, setting them apart from competitors.
The EV Market: Challenges and Opportunities
Despite facing scrutiny for focusing on SiC chips amid a slowdown in electric vehicle and industrial equipment sales, El-Khoury's strategy remains sound. Car buyers have stepped back from pricier EVs, leaning toward traditional or hybrid models in the current economic climate. This shift has contributed to a 37% decline in On's stock from its peak.
Nonetheless, hybrids present a growth avenue for On Semiconductor. Their typical content value stands at around $50 in traditional internal combustion engine vehicles, escalating to $350 for hybrids and $750 for pure battery EVs. Even extended-range hybrids, which are gaining popularity in certain markets, offer similar content levels as battery EVs.
Looking into the future, industry leaders, including El-Khoury, are optimistic about the long-term dominance of electric vehicles. The declining costs associated with batteries, which represent the highest expense in EV manufacturing, are expected to drive increased affordability. Insights from industry experts suggest that by 2025, the price gap between electric and conventional vehicles could diminish.
Attractive Valuation for Potential Growth
On Semiconductor is currently trading at just 15.8 times its trailing earnings. This metric reflects a stagnant phase in the auto and EV markets. However, with its strong position in silicon carbide technology and an anticipated recovery in demand for electric vehicles, investors might find this a prime buying opportunity.
Seize This Opportunity
Have you ever felt like a great investing opportunity slipped through your fingers? Now might be your chance to consider On Semiconductor again.
Investing in undervalued stocks can drastically change your portfolio performance. For example, if you had invested in other significant stocks at a pivotal moment, you might have seen substantial returns. Don’t miss out on what could be a transformative investment.
Explore further opportunities and consider these insights about companies that could lead to another chance for wealth accumulation. Be prepared to act swiftly, as excellent investment opportunities rarely remain available for long.
Frequently Asked Questions
What is On Semiconductor known for?
On Semiconductor is recognized as a leading chip supplier, particularly in the automotive sector and for its innovative silicon carbide (SiC) solutions.
Why is silicon carbide important in the EV industry?
Silicon carbide technology enhances the efficiency and range of electric vehicles, allowing manufacturers to produce vehicles with smaller batteries, which reduces costs.
What is the expected growth for electric vehicles?
While current sales have slowed, industry experts expect the demand for electric vehicles to pick up significantly, especially as battery prices decrease.
What are the financial metrics for On Semiconductor?
As of now, On Semiconductor is trading at a price-to-earnings ratio of 15.8, indicating it may be undervalued in today's market.
How can investors capitalize on this information?
Investors looking for undervalued stocks with growth potential may want to consider adding On Semiconductor to their portfolios, focusing on the long-term recovery in the EV industry.
