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On Tuesday, Morgan Stanley (NYSE:MS)’s analysts adjusted their outlook on ON Semiconductor (NASDAQ:ON), reducing the price target from $52.00 to $44.00 while maintaining an Underweight rating on the company’s shares. The firm’s analysts cited multiple challenges across ON Semiconductor’s product portfolio that are expected to impact revenue and gross margins. According to InvestingPro data, the stock has already fallen 34% over the past six months and is currently trading near its 52-week low of $46.57, though analysis suggests the stock may be undervalued at current levels.
The analysts noted that from 2016 to 2020, ON Semiconductor’s gross margins ranged between 30-40%, with the company’s forward price-to-earnings (PE) ratio trending between 10-15 times. However, under the leadership of CEO Hassane El-Khoury, who took the helm in December 2020, gross margins saw an improvement to 45-50%. This was attributed to a strategic review and subsequent changes initiated by El-Khoury, which appeared to bear fruit, causing the company to trade at a higher PE ratio of 15-20 times since his appointment. Current InvestingPro metrics show the company maintaining a healthy gross margin of 45.8% and a P/E ratio of 14.12, with strong financial health indicators including a current ratio of 3.07.
Despite these improvements, the analysts are concerned about the sustainability of these changes. A decline in gross margin back to 40% has raised questions about whether the improvements made between 2020 and 2022 were structural. This concern has also influenced the valuation multiple that Morgan Stanley applies to the company. The analysts have maintained a forward PE target multiple of 13 times, which, when applied to the revised fiscal year 2026 earnings per share estimate of $3.38, led to the lower price target of $44.00.
The revised price target reflects Morgan Stanley’s caution regarding ON Semiconductor’s future performance and valuation, especially in light of the current headwinds that the company is facing. The firm’s stance remains cautious as they continue to monitor the semiconductor industry and ON Semiconductor’s strategic initiatives and financial outcomes.
In other recent news, ON Semiconductor has been the subject of several analyst revisions following its first quarter 2025 forecast, which was significantly lower than market expectations. Needham has reduced its target price for ON Semiconductor to $57, keeping its Buy rating, citing ongoing demand weakness and inventory issues. Meanwhile, Mizuho (NYSE:MFG) Securities has cut its price target from $85 to $71, maintaining an Outperform rating, despite the company’s anticipated 19% sequential decline in revenue.
Evercore ISI has also adjusted its price target for ON Semiconductor to $75 from $107, while still maintaining an Outperform rating. Citi has reduced its price target for the company to $52, maintaining a Neutral rating, and Jefferies has lowered its price target from $100 to $85, while keeping a Buy rating.
These recent developments come on the heels of ON Semiconductor’s announcement of a strategic shift away from price-sensitive markets, estimated revenue decreases in the automotive and industrial sectors, and expected gross margin contraction. Despite these challenges, analysts from Needham, Mizuho, Evercore ISI, and Jefferies maintain a positive outlook on the company’s stock.
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