Is ON Semiconductor a Better Long-Term Investment Than Intel?

TipsForTraders | May 1, 2024

Responsive image

Two major players in the semiconductor industry, ON Semiconductor (NASDAQ:ON) and Intel (NASDAQ:INTC), present contrasting investment prospects according to recent data analyzed using TipRanks’ Comparison Tool. ON Semiconductor appears poised for long-term growth, while Intel presents a more uncertain outlook. This analysis delves deeper into their financial health, market positions, and future potentials.

ON Semiconductor, commonly known as onsemi, has carved out a niche in producing system-on-chip (SoC), application-specific integrated circuits (ASICs), and bespoke solutions targeted at the automotive, industrial, medical, and aerospace & defense sectors. On the other hand, Intel’s product range is more focused on chips for data centers, servers, PCs, and Internet of Things devices.

The financial trajectories of the two companies reveal significant downturns, with onsemi’s stock down 16% since the start of the year and Intel’s dropping a steeper 39%. However, Intel still shows a slight year-over-year gain of 2%, while onsemi’s year-over-year performance dipped by 10%. This contrasts sharply with the stellar gains of other industry players like Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD), which have surged 75% and 7.5% respectively this year.

A critical examination of valuation via the price-to-earnings (P/E) ratio indicates that onsemi trades at a P/E of 14.7x, substantially below the industry’s current average of 57.3x and its own three-year average of 33.3x. This positions onsemi as undervalued, particularly when compared to Intel’s P/E of 32.5x.

ON Semiconductor recently reported a 4% increase in share value following its first-quarter earnings, which exceeded expectations despite a 5% drop in sales year-over-year. The company projected lower-than-anticipated revenue and earnings for the upcoming quarter, reflecting broader struggles in the automotive sector, particularly due to its significant exposure to Tesla (NASDAQ:TSLA) and the broader electric vehicle (EV) market downturn.

Despite these challenges, industry analysts predict a rebound in EV sales, which could benefit onsemi, especially given its strategic partnerships with major automakers like BMW (OTCMKTS:BMWYY) and Volkswagen (OTCMKTS:VWAGY) for its silicon-carbide technology. Over the past decade, onsemi has demonstrated robust growth, surging 687%, underscoring its potential as a long-term investment.

Intel, meanwhile, remains in a precarious position. Its first-quarter earnings showed some improvement over the previous year’s losses, but it still recorded a net loss and failed to meet revenue expectations for the forthcoming quarter. The company’s high-profile initiatives in AI and domestic chip production are ambitious, with over $100 billion invested, yet its foundry business is not expected to turn profitable until 2027. This casts a shadow over Intel’s ability to capitalize on current and future technology trends.

Analyst consensus rates ON Semiconductor as a Moderate Buy with a potential upside of 70.5%, suggesting strong confidence in its recovery and growth prospects. In contrast, Intel holds a Hold rating with a more modest expected upside of 31.15%, reflecting the market’s hesitancy due to its operational and strategic uncertainties.

In conclusion, while both ON Semiconductor and Intel offer unique aspects for investors, onsemi stands out with a more favorable long-term outlook based on its market position, financial health, and strategic initiatives in the evolving automotive sector. Intel, facing significant challenges and operational losses, warrants a cautious approach, making it less attractive in the near term. Investors might find onsemi a more compelling choice, despite its current challenges, due to its discounted valuation and promising technological advancements.