3 Reasons to Buy ON Semiconductor Stock Like There's No Tomorrow

One of growth investors' biggest complaints is the need for more growth stock candidates at reasonable valuations. Such situations rarely arise when a company is firing on all cylinders.

Still, you often can buy a stock at a reasonable valuation when the market has fallen out of love with it, due to temporary weakness in its end markets. That seems to be the case with ON Semiconductor (ON -1.51%) right now. The stock deserves a closer look from growth-oriented investors, and here are three reasons why.

The long-term growth story

The investment case for the stock rests on management's pivot toward the automotive and industrial end markets. ON Semiconductor's intelligent technology is used in electric vehicles (EVs) and hybrid electric vehicles (HEVs), and helps reduce their weight, make them run longer, and charge more quickly.

Meanwhile, the company's advanced sensing technologies are vital to smart factories and facilities. They're also used in the automotive industry in advanced driver assistance systems (ADAS) and automated driver systems. Management continues to structure the company for long-term growth in these end markets.

The slowdown is temporary

It's fair to say that none of these end markets are on fire in 2024 -- at least not relative to expectations going into the year. Relatively high interest rates have slowed EV sales, and automakers have cut back on development spending. The situation is similar in the industrial sector, with a marked slowdown in industrial automation orders.

The chart below shows the nature of the decline in its key industrial and automotive end markets.

Data source: ON Semiconductor.

That said, the reasons for the revenue decline look temporary and relate to a high-interest-rate market. With lower interest rates on the way, EV/HEV sales should pick up, leading to investment flowing into expanding production. In a demonstration of the auto industry's commitment to investing in EVs, ON Semiconductor recently inked a multiyear deal with Volkswagen to be the primary supplier of power-box solutions.

In addition, there's been a slowdown in factory automation spending, evidenced by the order patterns of companies with exposure, such as Emerson Electric and Rockwell Automation. This combination of slowing growth and automation-product distributors running down inventory rather than placing new orders appears temporary.

There's a reason why companies like Emerson Electric, Siemens, and Honeywell are making automation a key focus of their growth plans. Factory automation allows developed countries to compete on cost with low-cost countries in manufacturing.

Image source: Getty Images.

Attractive valuation

There's no way of avoiding the elephant in the room: ON Semiconductor's sales are declining and set to fall in 2024. Moreover, CEO Hassane El-Khoury is talking of an "L-shaped" recovery, meaning a slow and gradual recovery will follow the steep decline.

The good news is that a conservative outlook is baked into the stock's valuation, so the potential risk is on the upside.

To indicate the company's attractive valuation, here's a look at some standard valuation multiples using the Wall Street analyst consensus. They're excellent multiples for a growth stock passing through a trough in revenue and earnings in 2024, implying that the market doesn't believe in the Wall Street consensus. In the last case, EV is enterprise value (market cap plus net debt) divided by earnings before interest, taxation, depreciation, and amortization (EBITDA).

Data source: marketscreener.com, author's analysis.

The market has reason to doubt the numbers. No one can feel entirely comfortable in a company with declining sales, but if the market is wrong, then the upside potential is significant.

A stock to buy?

Suppose you believe the automotive sector's future lies in EVs/HEVs, ADAS, and automated driving systems, rather than traditional internal combustion engines (ICE). In that case, you may believe that ON Semiconductor has a bright future -- not least because it generates significantly more content per vehicle on EVs than on ICE-powered vehicles.

Image source: Getty Images.

Moreover, the stock will be attractive if you like the megatrend toward factory automation, renewable energy, and EV charging networks.

It's not going to be an immediate recovery. Still, the underlying drivers, clean energy (EVs, etc.) and the digital revolution in factory automation generating productivity gains through investment in automation are in place, even if short-term spending remains weak.