onsemi currently trades at $54.98 per share and has shown little upside over the past six months, posting a middling return of 2%. The stock also fell short of the S&P 500’s 14.4% gain during that period.
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Why Is onsemi Not Exciting?
We're cautious about onsemi. Here are three reasons we avoid ON and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, onsemi’s 3.5% annualized revenue growth over the last five years was mediocre. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect onsemi’s revenue to stall. While this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.
3. Low Gross Margin Reveals Weak Structural Profitability
In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.
onsemi’s gross margin is well below other semiconductor companies, indicating a lack of pricing power and a competitive market. As you can see below, it averaged a 41.2% gross margin over the last two years. That means onsemi paid its suppliers a lot of money ($58.79 for every $100 in revenue) to run its business. 
Final Judgment
onsemi’s business quality ultimately falls short of our standards. With its shares trailing the market in recent months, the stock trades at 20.7× forward P/E (or $54.98 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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