Afterpay: An interactive valuation
Introduction
Onsemi (NASDAQ:ON) is a leading semiconductor manufacturer listed on the NASDAQ. More specifically, Onsemi manufactures the semi-conductors that are needed to power the future; 'power' semi-conductors. These semiconductors drive the acceleration in an electric vehicle or convert sunlight into energy from a solar panel. As the world transitions to these technologies, we expect Onsemi will be a major player.Onsemi is similar to other semiconductor manufacturers Texas Instruments (NASDAQ:TXN), Infineon Technology (ETR:IFX), Analog Devices (NASDAQ:ADI) and Wolfspeed (NYSE:WOLF). We've put together an interactive valuation that compares Onsemi to these peers, based on an 'Enterprise Value/Sales’ ratio.
The outputs above summarise Onsemi’s current share price and market cap. This will stick to the top of your screen as you scroll further down the page and as you 'interact' with the Enterprise Value to Sales ratio, this valuation will update in response.
Enterprise to Sales Valuation
Enterprise Value to Sales is the ratio of market value of a company's shares minus its cash plus its debt over its revenue. It’s used a measure of how expensive a company is compared to the revenue it generates. If the company is viewed as a fast grower by the market, the multiple will generally be higher.
For financial year 2022, analysts have Onsemi's revenue growing at 7%, IFX's staying flat, ADI's growing at 4%, TXN's growing at 3% and WOLF's growing at 39%. Therefore, Onsemi’s revenue is predicted to grow the second fastest (behind WOLF), yet it’s Enterprise Value/Sales ratio is the lowest compared to its peers. Given this, we think Onsemi can justify an Enterprise Value/Sales ratio at 2-3x its current ratio in line with ADI and TXN.
Decide for yourself by adjusting Onsemi’s Enterprise Value/Sales ratio, remembering to keep an eye on valuation at the top of your screen.
At the time this article was published, Onsemi last traded at $61.99 per share. Based on your input Enterprise Value/Sales ratio, Onsemi should trade at
Why is Onsemi so cheap compared to its peers?
The Debate About Growth Prospects & Pivot
Onsemi’s new management team is pivoting the company away from lower margin consumer products such as iPhone chips to high margin 'Intelligent Power & Sensing' products. This has caused fluctuations in analyst estimates of revenue growth.
The Bull Case
Power semiconductors products are used in electric vehicles. Today, less than 5% of cars sold are electric cars with that number predicted to grow to 50% by 2030. This represents a significant opportunity for Onsemi to grow.
In addition, as the world transitions from fossil fuel energy to renewable energy, power semiconductors are needed to convert wind and sun into energy.
This will push Onsemi away from being an industrial cyclical company into a structural grower, propelling earnings into the future.
The Bear Case
Execution risk is a factor that may play into the success of Onsemi’s pivot. Typically, pivots can take time and resources and may not result in near term revenue growth.
Summary
At the time of writing this article, Onsemi’s valuation was $26.7B or $61.99 per share. You arrived at a valuation of
Methodology:
The valuation of On Semiconductor Corporation was derived using a peer based valuation methodology, based on Enterprise value ratios for the selected peer group. All data is sourced from public market annoucements. Some data may be sourced from third party data aggregators. The information provided on this site is general in nature, not financial product advice. Your personal objectives, financial situation or needs have not been taken into consideration.
All enquiries to mharper@moderninvestor.com.au.
