ON Semiconductor: Q3 Earnings Set Stage For Bullish Trend

ON Semiconductor Corporation (NASDAQ:ON) disclosed Q3 2023 earnings, demonstrating robust revenue growth and impressive gross margins. The automotive and industrial sectors were particularly noteworthy, achieving record revenues, with the automotive market experiencing a significant year-over-year increase. This article extends the discussion initiated in the previous piece, delving into a technical examination and assessment of the company’s financial health to identify potential investment opportunities and prospects. Notably, as expected, the stock price has adjusted to a significant long-term support level, offering a compelling buying opportunity.

Financial Metrics and Strategic Achievements

ON Semiconductor recorded a revenue of $2.181 billion, with GAAP and non-GAAP gross margins reaching 47.3% in Q3 2023. The operating margins were notably strong, with a GAAP operating margin of 31.5% and a slightly higher non-GAAP operating margin of 32.6%. In addition, the company posted strong earnings per share figures, with GAAP diluted earnings per share at $1.29 and non-GAAP diluted earnings per share at $1.39. The chart below presents the company’s quarterly revenue and net income, highlighting a significant upward trend, with a Q3 2023 net income of $582.70 million. This robust growth trajectory suggests a promising outlook for the company’s profitability in the future.

Q3 2023 also marked unprecedented milestones in particular segments, setting new records. The automotive sector’s revenue surged to a historic peak of $1.2 billion, marking a significant 33% increase year-over-year. Likewise, the industrial sector reported a record revenue of $616 million, noting a modest rise from the previous year. Hassane El-Khoury, President and CEO of ON, credited these accomplishments to the company’s strict strategic approach and successful implementation, underscoring the resilience of business in the face of market adversities. El-Khoury highlighted the company’s continuous structural enhancements and increased efficiencies, especially in silicon carbide operations. A significant milestone in this area was the completion of the expansion of the world’s largest advanced silicon carbide fabrication facility in South Korea, designed to handle both 150- and 200-millimeter wafers.

Additionally, the guidance for Q4 2023 provides both GAAP and non-GAAP financial outlooks for ON Semiconductor. The revenue is projected to be between $1.95 and $2.05 billion for GAAP and non-GAAP measures, indicating a consistent top-line expectation across accounting standards. The projected gross margins are anticipated to range from 45.4% to 47.4% for GAAP gross margin, with non-GAAP gross margin forecasts slightly exceeding these figures, estimated to be between 45.5% and 47.5%.

Operating expenses are anticipated to range from $314 to $329 million on a GAAP basis, with an additional $14 million expected in special items. Non-GAAP operating expenses are projected to be slightly lower, between $300 to $315 million, which could be due to excluding certain expenses included in GAAP calculations. Furthermore, diluted earnings per share are expected to be between $1.10 and $1.24 for GAAP and slightly higher at $1.13 to $1.27 for non-GAAP.

Overall, ON Semiconductor’s financial performance in Q3 2023, combined with its strategic achievements in key sectors and the expansion of its advanced silicon carbide fabrication facility, paints a picture of a company on a robust growth path. The significant revenue gains in the automotive and industrial sectors, driven by the company’s strategic approaches and operational efficiencies, have set new benchmarks in its financial journey. Looking ahead, the guidance for Q4 2023 reflects a stable and optimistic financial outlook, suggesting that ON Semiconductor is well-positioned to continue its growth trajectory and profitability in the evolving semiconductor market.

Examining Technical Stability at Key Support Levels

Recap

The previous article discussed the intense volatility in ON Semiconductor and indicated a correction before the next strong rally. The heavy volatility bars on the quarterly chart highlighted the volatility in the market, with a solid bullish trend. Additionally, the monthly chart presented a strong bullish trend, but the RSI showed the overbought conditions. The weekly chart further highlighted the emergence of an ascending broadening wedge pattern, with the price correction to the vital support regions. The strong support was $77, considered a substantial buying opportunity for long-term investors.

What is Next?

As per expectations, the revised monthly chart below presents a downturn in the stock price, reaching the solid support level of $77. While this support level was briefly surpassed, a rapid reversal candle was observed, culminating in forming a bullish hammer in November 2023. This candle presents the similarity of monthly candles for July 2021 and July 2022, which previously sparked significant market rallies, peaking at an unprecedented high of $111.35. Additionally, the RSI is holding steady at the 50 mark, suggesting a potential rebound from this point.

This strong rally was initiated after 2020 due to several key factors. Firstly, the global semiconductor industry saw a surge in demand, driven by rapid advancements and increased reliance on technology in various sectors, such as automotive, consumer electronics, and telecommunications, particularly during the COVID-19 pandemic. With its focus on automotive and industrial applications, ON Semiconductor was well-positioned to capitalize on this trend. The company’s strategic initiatives to improve operational efficiency and focus on high-margin products also contributed to improved financial performance. Supply chain constraints and a global chip shortage also played a role, leading to increased prices and higher demand for ON Semiconductor’s products. This combination of favorable market conditions, strategic positioning, and industry-wide trends contributed to the company’s stock value increase post-2020.

Key Action for Investors

To gain a deeper insight into the highly optimistic perspective on ON Semiconductor, the updated weekly chart illustrates an ascending broadening wedge pattern that started from the 2020 low of $8.17 and extended to the record highs. The stock price’s recent dip reached the robust support of this wedge, where a bullish hammer in November 2023 formed at the support line. The low in November 2023, marked at $61.47, coincides with this support, and the current stabilization around this level suggests an excellent opportunity for long-term investors to buy. Additionally, the RSI shows signs of recovery from an oversold state, indicating a potential strong market rally.

Investors may consider building long positions at the current levels, anticipating significantly higher prices from this substantial support base.

Market Risk

The global semiconductor industry is highly cyclical and sensitive to economic fluctuations. A downturn in the global economy or specific key markets such as automotive or consumer electronics can significantly impact demand for ON Semiconductor’s products. This risk is accentuated by the current economic uncertainty, with inflation, geopolitical tensions, and potential trade disputes potentially affecting consumer and industrial spending. The semiconductor industry is known for rapid technological changes and intense competition, which requires constant innovation and adaptation. Failure to keep up with these changes or to manage supply chain complexities can adversely affect ON Semiconductor’s market position and financial performance.

The technical analysis of ON Semiconductor’s stock shows a pattern of intense volatility. While the company has demonstrated resilience and growth, particularly in its silicon carbide operations, stock prices have experienced significant fluctuations. A closing price below $60 for the month would signify a break in the ascending broadening wedge pattern, suggesting a significant market correction.

Bottom Line

In conclusion, ON Semiconductor’s impressive performance in Q3 2023, marked by robust revenue growth, particularly in the automotive and industrial sectors, and strong gross margins, positions the company favorably in the semiconductor industry. Expanding its advanced silicon carbide fabrication facility is a testament to its commitment to innovation and efficiency, further strengthening its market position. The Q4 2023 projections suggest continuing this positive trend, maintaining optimism for the company’s future.

The technical analysis reveals that, after a period of expected volatility, ON Semiconductor’s stock price has reached a significant long-term support level, offering a compelling buying opportunity for investors. The patterns observed in the monthly and weekly charts and the RSI indicators suggest a potential rebound and a continuation of the bullish trend from these levels. Investors may consider buying the stock at the current price, with expectations of a price increase, provided that the stock does not close the month below $60.