AI Data Center Growth Guidance Raised, Driving Improved Earnings and Profit Expectations for ON Semiconductor

Overview

The report believes that ON Semiconductor’s second-quarter results were generally in line with expectations, while third-quarter guidance was slightly above consensus, driven primarily by AI data centers. The company raised its 2026 AI data center growth guidance and disclosed design wins related to AWS battery backup units and power supply units, the NVIDIA MGX ecosystem, and leading hyperscale cloud customers. At the same time, automotive demand remained stable, the industrial business showed signs of recovery, and higher capacity utilization is expected to drive continued gross margin improvement.

Core views

The core thesis includes three points: first, AI data centers have become the main source of incremental growth, with 2026 revenue expected to more than double year over year, including data center silicon carbide revenue expected to grow by about 60%; second, the profit contribution from higher capacity utilization typically lags by one to two quarters, and the company reiterated sequential gross margin expansion before the end of 2026; third, the automotive business grew year over year and China performed strongly, while demand in industrial, energy infrastructure, medical, and factory automation is also beginning to improve. The book-to-bill ratio remains significantly above 1, and customer orders extend into 2027 to 2028, improving forward visibility.

Analysis framework

The report compares the company’s actual second-quarter revenue, gross margin, and EPS with consensus expectations and Morgan Stanley forecasts, and uses this to assess third-quarter guidance; it also incorporates end-market growth, design wins, capacity utilization, lead times, and order behavior to update revenue, gross margin, and EPS forecasts for 2026 to 2027.

Methodology notes

• Financial forecastingMorgan Stanley ModelWare

  Forecasting revenue, margins, and EPS based on a standardized financial model

  Unless otherwise specified, the report’s metrics are based on the Morgan Stanley ModelWare framework and incorporate the company’s actual data, management guidance, and analyst forecasts.

• Expectation comparisonConsensus expectations comparison

  Comparing actual results and company guidance with consensus expectations and analyst forecasts

  The report uses consensus expectations provided by Refinitiv Estimates and cross-compares them with Morgan Stanley forecasts to identify the degree of earnings beats or misses.

• Earnings sensitivityCapacity utilization–gross margin framework

  Each 1 percentage point increase in utilization contributes about 25 to 30 basis points to gross margin

  Management reiterated this sensitivity relationship, but profit improvement typically lags by one to two quarters, so the second-quarter utilization increase mainly supports gross margin expansion in subsequent quarters.

Asset mapping & comparison

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

• ON Semiconductor Corp. (ON.US)

  Directly covered target

  Strengths

  Strong AI data center design wins, expanded cooperation with AWS, NVIDIA MGX, and leading hyperscale cloud customers; book-to-bill ratio significantly above 1; increased automotive silicon carbide share; rebound in capacity utilization supports gross margin.

  Weaknesses

  The automotive business is still affected by European seasonality in the near term, margin improvement has a one- to two-quarter lag, and there is currently no valid rating or target price as a valuation reference.

  Comparison

  Second-quarter key metrics were broadly in line with or slightly above consensus expectations, and third-quarter revenue, gross margin, and EPS guidance were all above consensus expectations; the company’s stated improvement in industrial demand is consistent with trends among semiconductor peers.

  Risks

  Data center demand or design-win conversion may fall short of expectations, supply constraints, adjustments to customers’ forward orders, fluctuations in automotive demand, gross margin improvement below expectations, and uncertainty around Synaptics transaction approval and integration.

Key data

• Second-quarter revenue$1.604 billionUp 6.0% quarter over quarter and 9.2% year over year, above consensus expectations of $1.588 billion and Morgan Stanley’s forecast of $1.592 billion.
• Second-quarter non-GAAP gross margin39.3%Consensus expectations were 39.0%, and Morgan Stanley’s forecast was 39.1%.
• Second-quarter non-GAAP EPS$0.74Above consensus expectations of $0.71 and Morgan Stanley’s forecast of $0.72.
• Midpoint of third-quarter revenue guidance$1.700 billionAbove consensus expectations of $1.670 billion and Morgan Stanley’s forecast of $1.676 billion.
• Midpoint guidance for third-quarter gross margin and EPS41.0% / $0.87Above consensus expectations of 40.3% and $0.83, respectively.
• 2026 AI data center revenue growth forecast+126% YoYMorgan Stanley’s previous forecast was +118%; company guidance was raised from doubling year over year to more than doubling.
• Second-quarter capacity utilization83%Up 6 percentage points from about 77% in the first quarter, with the margin contribution expected to appear with a lag of one to two quarters.
• Updated 2026 forecastRevenue of $6.566 billion, gross margin of 40.3%, EPS of $3.19Previous forecasts were $6.472 billion, 40.1%, and $3.12, respectively.
• Updated 2027 forecastRevenue of $7.551 billion, gross margin of 43.8%, EPS of $4.42Previous forecasts were $7.196 billion, 44.0%, and $4.36, respectively.
• Automotive and industrial business performanceAutomotive -2% QoQ, +7% YoY; industrial +1% QoQ, +4% YoYThe sequential decline in automotive was consistent with European seasonality; mass-market revenue increased 20% quarter over quarter and is viewed as a positive leading indicator for industrial demand.

Impact & implications

AI data center growth is improving ON Semiconductor’s revenue growth and business mix quality, while rising capacity utilization is creating conditions for subsequent gross margin expansion. If design wins convert smoothly, the industrial recovery continues, and automotive silicon carbide share continues to increase, the company’s revenue and EPS may remain on an upward trend from 2026 to 2027. However, because the current rating and target price are unavailable, the report cannot provide a clear valuation upside.

Risks

• High-growth guidance for AI data centers depends on mass production of design wins and hyperscale cloud customer capital expenditure, and actual conversion may fall short of expectations.
• Lead times have extended from about 27 weeks to about 32 weeks, and tighter supply may constrain deliveries while increasing capacity allocation and customer fulfillment risks.
• Some production volume has shifted from automotive customers to AI data center solutions, and whether it can smoothly shift back in subsequent quarters remains to be verified.
• The contribution of higher utilization to gross margin lags by one to two quarters, and pricing measures and selective price increases may not fully offset cost pressure.
• Customer orders extending into 2027 to 2028 improve visibility, but forward orders may still be affected by demand changes, duplicate ordering, or cancellations.
• The acquisition of Synaptics still requires shareholder and regulatory approvals and faces risks related to deal completion and subsequent integration.
• Morgan Stanley is serving as financial advisor to ON Semiconductor in its acquisition of Synaptics and has investment banking and other business relationships with covered companies, which may create potential conflicts of interest.

What to watch

• Whether AI data center revenue can achieve the 2026 growth guidance of more than doubling.
• The mass-production pace of design wins with AWS, NVIDIA MGX, and other leading hyperscale cloud customers.
• Whether the third-quarter “Other” business can achieve high-teens sequential growth.
• After capacity utilization improves, whether third-quarter gross margin guidance of 40% to 42% and further improvement in the fourth quarter can be delivered.
• Whether automotive silicon carbide revenue can achieve 60% to 70% year-over-year growth.
• The sustainability of the recovery in industrial, mass-market, and energy storage system demand.
• Whether the book-to-bill ratio, lead times, and customer orders extending into 2027 to 2028 remain stable.
• Shareholder approval, regulatory approval, and closing progress for the Synaptics acquisition.