ON semiconductor DD via /r/wallstreetbets #stocks #wallstreetbets #investing


ON semiconductor DD

TLDR: ON semi is gaining market share in producing chips used in EV's. They will go from ~$100 content per car to about ~$1600 per car. At the same time, the portion of cars that are EV's will also increase, resulting in a very large revenue stream. At the same time they are leaders in charging station equipment, so the EV trend will make them a ridiculous amount of revenue over the next 5 years.

-On Semiconductor Corporation, (ON $44.70) investment thesis is exciting as ON benefits from the growth of the adoption electric vehicles (EVs) over the next decade which is increasing by 7x. Also the growing silicon content per car for ON driven by the electrification and autonomous driving features, which is growing 10x over the next few years to around $1,600 per car. On benefits from the expanding gross margin, profitability, and cash flow that comes from higher volume, lower supply costs, and more efficient manufacturing.  In addition, ON also has significant content in 5G telecom infrastructure and cloud computing applications touching base on all three major macro trends we have identified (5G rollout, cloud computing and EVs).

-The company stands to benefit from the adoption of EVs over the next 10 years moving from around 12% of total vehicle sales in 2020 to around 62% in 2030.  To put this growth in perspective the US sells around 17 million vehicles per year with the European Union selling around 15 million units and China accounting for about 19-22 million vehicles each year so the market is massive.  At least 25 million more EVs per year will be added to the mix over the next 10 years providing strong unit volume growth of EV's in total and strong growth opportunity for ON.

-ON's current content per car is around $160 and is expected to be over $715 per car in 2022 and to be over $1,500 by 2025 as semiconductor content per car grows dramatically with the adoption of EVs and ADAS or autonomous driving features in cars .  The total semi content per car is expected to grow to over $1,500 by 2025 as both ADAS and EVs drive significant content growth per car for ON.  So the number of EV's sold annually will grow from around 9 million in 2020 to 62 million in 2030 or a 7x increase over a ten year period and the silicon content per car for ON is growing more than 2x over the next 3-4 years driving a double whammy for top line growth for the company.  ON predicts its power business will grow by a CAGR of 15% over the next four years with intelligent sensing business growing by a CAGR of 13% over the same period.  By end market automotive revenue should grow by a CAGR of 17% (versus market growth of around 4-6%) and the industrial market should grow by a CAGR of 7% versus market growth of around 4-5%.  Industrial and automotive make up about 60% of ON's revenue now moving to over 75% by 2025 as the mix shifts into higher margin product lines.

-ON has around $2,000-$4,000 in content per EV charging station which should be another huge driver of growth as all the EV's sold will need to be charged and with the company's expertise in silicon carbide (SiC) process technology ON should be one of the leaders in SiC applications for both cars (more efficient battery management systems leading to longer travel time) and fast charging, which is now moving to the 20-30 minute range when using SiC chips from ON.

-The company also has exposure to 5G infrastructure and cloud computing with around $300 in content per platform giving ON exposure to all three major macro trends we really like.  The company's content per platform should continue to increase as ON finds new applications with current customers as equipment becomes faster and more sophisticated managing the power flow and consumption becomes ever more critical.

-Another thing we like about the ON story is the gross margin expansion opportunities which should mover from 38% to 45% over the next few years and we believe this business can have gross margins in the 48-52% range over the longer term as ON sheds less profitable segments (probably eliminating 10-15% of current sales over the next few years), ON sees a major mix shift to higher margin products in the industrial and automotive segments, the company lowering costs in the supply chain and fab balancing eliminating older less efficient fabs and loading as much as possible into the company's 300mm fab in upstate NY.  All of these actions will drive significant gross margin, cash flow and EPS expansion hopefully making it a successful investment.

Submitted November 25, 2021 at 09:24PM by toolbox_financial
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