BofA cuts ON Semiconductor price target to $46, maintains buy

On Tuesday, BofA Securities adjusted its outlook on ON Semiconductor (NASDAQ:ON), reducing the price target to $46 from the previous $48 while still recommending the stock as a Buy. Currently trading at $38.41, InvestingPro analysis suggests the stock is undervalued, with a P/E ratio of 28.4x and EV/EBITDA of 8.3x. The firm’s analysis indicates that ON Semiconductor is likely to face challenges that will impact its gross margins (GM) and operating expenses (opex). Specifically, the gross margins for the fiscal years 2025 and 2026 are now projected at approximately 38% and 40%, which reflects a reduction of 100 basis points and 250 basis points, respectively, compared to prior estimates.

The analysts at BofA Securities noted that the company’s earnings per share (EPS) are under pressure due to competitive factors, leading to increased operating expenses, which are estimated to be $282 million at the end of the fourth quarter of 2025, $30 million higher than previous expectations. Despite the lower visibility for the second half of the year, they anticipate a modest quarter-over-quarter recovery in the third and fourth quarters. According to InvestingPro data, the company maintains strong financial health with a Current Ratio of 4.95, indicating robust liquidity to manage near-term obligations. This expected improvement is attributed to emerging industrial opportunities, rising demand for electric vehicles in China, and incremental strength in data centers and consumer sectors.

As a result of these conditions, BofA Securities has revised its earnings estimates for the fiscal years 2025 and 2026 downward by 7% and 21% to $2.27 and $2.75 respectively. The price objective has been lowered to $46, based on a price-to-earnings multiple of 17 times the estimated earnings for 2026, which is an increase from the previous multiple of 14 times. This adjustment places the valuation within the historical range of 7 to 27 times but leans towards the higher end due to an extended downcycle.

Despite the revisions, BofA Securities maintains a Buy rating on ON Semiconductor, citing the company’s robust free cash flow (FCF), which is expected to be in the 25-30% range for the fiscal year 2025. The company currently generates a strong FCF yield of 9%, as reported by InvestingPro, which offers comprehensive valuation metrics and 15+ additional ProTips for this stock. The analysts also highlight the company’s low-leveraged balance sheet, which they believe provides ample opportunity for inorganic growth and share buybacks. Moreover, they find the valuation attractive at 14 times and 11 times the enterprise value to free cash flow (EV/FCF) for the fiscal years 2025 and 2026, which is considerably below the peer average of 34 times and 19 times.

In other recent news, ON Semiconductor Corporation announced its Q1 2025 financial results, which exceeded Wall Street expectations. The company reported earnings per share (EPS) of $0.55, surpassing the forecast of $0.52, and revenue of $1.45 billion, above the anticipated $1.41 billion. Despite these strong financial results, the company faced a sequential decline of 26% in its automotive revenue, which impacted overall performance. ON Semiconductor plans to increase share buybacks to 100% of free cash flow in 2025, reflecting its strategic financial management. The company continues to see strong momentum in its silicon carbide technology, especially in the Chinese electric vehicle market, which remains a key area of growth. Analyst firms such as Deutsche Bank (ETR:DBKGn) and Bank of America have inquired about the company’s pricing strategies and utilization metrics, indicating ongoing interest in ON Semiconductor’s market positioning. The company projects Q2 revenue between $1.4 billion and $1.5 billion, with a non-GAAP gross margin of 36.5-38.5%, reflecting cautious optimism amid macroeconomic uncertainties.

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