Cyclical recovery combined with AI data center power growth, but automotive, SiC, and pricing pressures limit relative upside

Overview

ON Semiconductor’s second-quarter revenue and EPS were slightly above consensus, and third-quarter revenue, gross margin, and EPS guidance also modestly beat expectations. Customer demand continued to improve, with a higher book-to-bill ratio, increased expedite orders, and longer lead times, indicating that the analog semiconductor cyclical recovery is still continuing. The company has not yet observed broad inventory replenishment, but AI data center power and electric vehicle applications provide company-specific growth drivers. Goldman Sachs expects the share price may rise after the results announcement and slightly raised its 2026 to 2028 forecasts, but considering automotive exposure, residual pricing pressure, and headwinds in SiC and image sensors, it maintains a Neutral rating.

Core views

First, cyclical demand improvement is continuing, but it has not yet entered a broad inventory replenishment phase, and there remains potential for further upward revisions to analog semiconductor earnings forecasts. Second, AI data center power is the most prominent source of structural growth, with related revenue in 2026 expected to exceed twice the 2025 level and to drive high-teens sequential growth in third-quarter other business revenue. Third, the automotive business is down sequentially in the short term due to European seasonality, but growth in semiconductor content per vehicle in Chinese electric vehicles and design wins in software-defined vehicles support the medium-term outlook. Fourth, higher capacity utilization, fab footprint optimization, and price increases are expected to drive continued sequential gross margin improvement. Fifth, positive industry and operating trends are still insufficient to offset the company’s relatively high automotive exposure, pricing pressure in some products, and headwinds in SiC and image sensors, so the relative investment rating remains Neutral.

Analysis framework

The report centers on the differences between quarterly results and next-quarter guidance versus Goldman Sachs forecasts and Visible Alpha market consensus, combined with end-market breakdowns of automotive, industrial, and other businesses, to analyze orders, lead times, capacity utilization, pricing, and structural design-win trends. Valuation uses a normalized EPS multiplied by a P/E multiple methodology, supplemented by read-through analysis to analog semiconductor peers.

Methodology notes

• Relative valuationP/E valuation method

  Estimate the target price by multiplying normalized EPS by the target P/E ratio

  The 12-month target price of $95 is derived from a 20x P/E ratio multiplied by $4.75 of normalized EPS, with the target price unchanged.

• Earnings analysisActual versus expected variance analysis

  Compare actual results, company guidance, institutional forecasts, and market consensus

  The report compares revenue, segment revenue, gross margin, and EPS against Goldman Sachs forecasts and Visible Alpha market consensus to assess the degree of earnings beat and potential share price reaction.

• Operating driver analysisEnd-market and margin driver decomposition

  Decompose growth and profitability changes from automotive, industrial, data center demand, and capacity utilization

  The report evaluates the sustainability of revenue and gross margin improvement through regional automotive trends, AI data center design wins, book-to-bill ratio, lead times, capacity utilization, and price increases.

• Factor analysisGS Factor Profile

  Measure a stock’s relative characteristics using growth, financial returns, valuation multiples, and composite factors

  The growth factor uses forward revenue, EBITDA, and EPS growth; the financial returns factor uses ROE, ROCE, and CROCI; the valuation factor uses metrics such as P/E, P/B, and EV/EBITDA, and converts normalized rankings into percentiles.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• ON SEMICONDUCTOR CORP (US.ON)

  Core covered company of the report

  Strengths

  Rapid growth in AI data center power revenue, increased semiconductor content per vehicle in China, more software-defined vehicle design wins, and room for recovery in capacity utilization and gross margin.

  Weaknesses

  Relatively high automotive exposure, industrial revenue still below expectations, pricing pressure in some products, and headwinds in SiC and image sensors.

  Comparison

  Second-quarter revenue, gross margin, and EPS were all above market consensus, but some metrics were below Goldman Sachs forecasts; relative to the analog semiconductor sector, the rating remains Neutral.

  Risks

  Weaker end-market automotive demand, gross margin improvement falling short of expectations, delayed realization of cost optimization, and intensifying pricing pressure.

• Analog Devices Inc. (ADI)

  Positive read-through analog semiconductor peer

  Strengths

  Its relatively high automotive exposure may allow it to benefit from the automotive and analog demand improvement signals disclosed by ON, and the report assigns it a Buy rating.

  Weaknesses

  The read-through conclusion mainly comes from industry and end-market demand trends, rather than direct validation of ADI’s own results.

  Comparison

  Goldman Sachs believes ADI and NXPI are the most direct peer read-through beneficiaries from these results.

  Risks

  If automotive demand improvement does not continue or inventory recovery is slower than expected, the positive read-through may weaken.

• NXP Semiconductors NV (NXPI)

  Positive read-through analog semiconductor peer

  Strengths

  Relatively high automotive exposure, with potential benefits from Chinese electric vehicles and improving analog semiconductor demand; the report assigns it a Buy rating.

  Weaknesses

  The report does not provide NXPI’s own operating data, and the read-through depends on common industry factors.

  Comparison

  Alongside ADI, it is one of the most direct automotive semiconductor peer read-through names from ON’s results.

  Risks

  Global auto production, European demand, and changes in customer inventories may affect the strength of the read-through.

• Nvidia

  AI data center customer and design ecosystem related party

  Strengths

  ON has made design-win progress in Nvidia’s MGX next-generation data center architecture, validating the competitiveness of its power solutions portfolio.

  Weaknesses

  The report does not disclose the specific revenue scale, share, or mass production timeline for the related design wins.

  Comparison

  This collaboration is an important example of ON’s power product portfolio breadth relative to other U.S. suppliers.

  Risks

  Design-win conversion, customer concentration, and changes in data center capital expenditure may affect actual revenue contribution.

• Amazon

  AI data center battery backup business related party

  Strengths

  Design progress in battery backup expands ON’s coverage in the data center power chain.

  Weaknesses

  The report does not disclose project scale or revenue recognition timing.

  Comparison

  Together with the Nvidia MGX project, it supports the view of structural growth in the AI data center business.

  Risks

  Project progress, customer procurement schedules, and technology substitution may cause revenue volatility.

Key data

• Second-quarter revenue$1.60bnBelow Goldman Sachs forecast of $1.62bn and above market consensus of $1.59bn.
• Second-quarter adjusted EPS$0.74Below Goldman Sachs forecast of $0.76 and above market consensus of $0.71.
• Second-quarter gross margin39.3%Below Goldman Sachs forecast of 39.7% and above market consensus of 39.1%.
• Second-quarter automotive revenue$781mnDown 2% sequentially, below Goldman Sachs forecast of $813mn and market consensus of $800mn.
• Second-quarter industrial revenue$423mnBelow Goldman Sachs forecast of $450mn and market consensus of $452mn.
• Second-quarter other business revenue$400mnSignificantly above Goldman Sachs forecast of $353mn and market consensus of $338mn.
• Midpoint of third-quarter revenue guidance$1.70bnBelow Goldman Sachs forecast of $1.73bn and above market consensus of $1.67bn.
• Third-quarter adjusted EPS guidance$0.81-$0.93Midpoint of $0.87, below Goldman Sachs forecast of $0.91 and above market consensus of $0.84.
• Midpoint of third-quarter gross margin guidance41.0%Close to Goldman Sachs forecast of 41.1% and above market consensus of 40.3%.
• AI data center revenue targetMore than double in 2026 versus 2025The 2025 base is $250mn.
• Second-quarter capacity utilization83%Expected to remain flat or rise further in the third quarter; each 1 percentage point increase is expected to improve gross margin by approximately 25 to 30 basis points.
• Fab optimization benefit$35mnExpected to begin materializing from 2027.
• 12-month target price$95Based on a 20x P/E ratio and $4.75 normalized EPS, unchanged.

Impact & implications

In the short term, slightly better-than-expected results and guidance, low market expectations, and relatively cautious investor positioning may drive a positive reaction in ON shares. In the medium term, the AI data center power business, higher automotive semiconductor content per vehicle, recovering capacity utilization, and cost optimization are expected to enhance revenue growth and earnings leverage. For the analog semiconductor sector, these results provide a moderately positive demand signal, with ADI and NXPI, which have higher automotive exposure, showing the most direct positive read-through. However, in the absence of broad inventory replenishment and with ON still facing automotive cyclicality, SiC, image sensor, and pricing pressures, sector improvement does not equate to an upgrade in the company’s relative rating.

Risks

• If automotive end-market demand weakens further, revenue and earnings forecasts may be revised downward.
• Seasonal weakness in European autos or a slowdown in Chinese electric vehicle growth may weaken the automotive business recovery.
• The company has not yet observed broad customer inventory replenishment, so the breadth and duration of the cyclical recovery remain uncertain.
• Continued pressure in the SiC and image sensor businesses may drag on product mix and profitability.
• Residual pricing pressure in some products and high input costs may limit gross margin expansion.
• If self-help measures such as higher capacity utilization, price increases, and fab optimization are delayed, profitability may fall short of expectations.
• AI data center design wins may not translate into mass production revenue as expected, and the related business may be affected by fluctuations in customer capital expenditure.
• Goldman Sachs discloses that it has shareholding, investment banking, non-investment banking services, and market-making relationships with ON SEMICONDUCTOR CORP; investors should pay attention to potential conflicts of interest.

What to watch

• Whether trends in customer book-to-bill ratio, expedite orders, and longer lead times can continue to strengthen.
• Whether signs of broad inventory replenishment across customers and end markets emerge.
• Whether third-quarter low-single-digit sequential growth in automotive, flat sequential industrial revenue, and high-teens sequential growth in other businesses can be achieved.
• Whether AI data center revenue can more than double in 2026 from $250mn in 2025.
• The mass production and revenue contribution progress of the Nvidia MGX and Amazon battery backup design projects.
• Regional demand divergence and changes in content per vehicle across the China, U.S., and European automotive markets.
• Whether capacity utilization can increase further from 83% in the second quarter and contribute approximately 25 to 30 basis points of gross margin improvement for each 1 percentage point increase.
• Whether the third-quarter 41% gross margin guidance and continued improvement through the rest of 2026 can be achieved.
• The realization pace of additional price increases and the $35mn fab optimization benefit starting in 2027.
• Whether inflection points appear in SiC, the image sensor business, and residual pricing pressure.