Data center demand becomes the core driver of ON Semiconductor's momentum

Overview

This report focuses on ON Semiconductor Corp.'s quarterly results, September quarter guidance, and changes to 2026-2027 earnings forecasts. The company's June quarter revenue was $1,604mn, up 9.2% year over year and 6.0% sequentially, broadly in line with market and Morgan Stanley expectations; non-GAAP gross margin was 39.3% and EPS was $0.74, both slightly above expectations. The midpoint of September quarter revenue guidance was $1,700mn, above market and Morgan Stanley expectations, while the midpoints of gross margin and EPS guidance were also above expectations.

Core views

The core view is that AI data center demand is becoming the primary driver of the company's growth and improved order visibility. ON raised its AI data center revenue growth guidance, with new design wins spanning AWS BBU and PSU support, expansion of the Nvidia MGX ecosystem, and major hyperscaler customers. At the same time, customers are extending orders into 2027-2028 to secure supply, which, together with higher capacity utilization and pricing actions, should support subsequent gross margin expansion. Although automotive revenue declined slightly sequentially, it grew year over year, while industrial revenue also showed preliminary signs of recovery.

Analysis framework

The report uses quarterly performance comparisons, management conference call takeaways, end-market segmentation, and the Morgan Stanley ModelWare forecasting framework to compare company actuals, Street consensus, and Morgan Stanley estimates, and accordingly adjusts 2026-2027 revenue, gross margin, and EPS forecasts.

Methodology notes

• equity_researchMorgan Stanley ModelWare

  Financial forecasting framework based on Morgan Stanley estimates and consensus methodology

  Unless otherwise stated, the key metrics in the report are based on Morgan Stanley ModelWare; e represents Morgan Stanley Research estimates, a represents company-reported actual data, and certain consensus data comes from Refinitiv Estimates.

• rating_frameworkMorgan Stanley stock ratings

  Relative rating system comprising Overweight, Equal-weight, Not-Rated, and Underweight

  Morgan Stanley uses a relative rating system that generally evaluates risk-adjusted total returns relative to the industry coverage universe over the next 12-18 months. In this report, ON's stock rating and price target are shown as ++, indicating that they are unavailable or have been removed.

Asset mapping & comparison

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

• ON Semiconductor Corp. (ON.US)

  Subject company

  Strengths

  Strong AI data center demand, increasing design wins, extended customer order visibility, higher capacity utilization, and strong expected growth in automotive SiC and ESS.

  Weaknesses

  Some automotive demand is temporarily giving way to AIDC solutions; the rating and price target are unavailable, and the company remains exposed to semiconductor cycles and fluctuations in end-market demand.

  Comparison

  June quarter revenue and EPS broadly met or slightly exceeded Street/MSe, while September quarter revenue, gross margin, and EPS guidance were all above Street/MSe.

  Risks

  AI data center growth below expectations, customer order pullbacks, inability to convert improved capacity utilization into gross margin expansion, unstable recovery in automotive and industrial demand, and regulatory or integration uncertainty related to the Synaptics acquisition.

• Synaptics Incorporated

  Proposed acquisition target

  Strengths

  ON has announced its proposed acquisition of Synaptics, with Morgan Stanley serving as financial advisor to onsemi.

  Weaknesses

  The transaction remains subject to Synaptics shareholder approval, regulatory approval, and other customary closing conditions.

  Comparison

  The report does not provide an independent valuation comparison for Synaptics.

  Risks

  Approval, closing, and merger integration risks.

Key data

• June quarter revenue$1,604mnUp 9.2% year over year and 6.0% sequentially, broadly in line with Street/MSe of $1,588mn/$1,592mn.
• June quarter non-GAAP gross margin39.3%Slightly above Street/MSe of 39.0%/39.1%.
• June quarter EPS$0.74Above Street/MSe of $0.71/$0.72.
• September quarter revenue guidance midpoint$1,700mnAbove Street/MSe of $1,670mn/$1,676mn.
• September quarter gross margin/EPS guidance midpoint41.0% / $0.87Above Street's 40.3%/$0.83 and MSe's 40.4%/$0.84.
• Capacity utilization83%Rose to 83% in 2Q from approximately 77% in 1Q26.
• 2026 revenue/gross margin/EPS estimates$6,566mn / 40.3% / $3.19Previously $6,472mn / 40.1% / $3.12.
• 2027 revenue/gross margin/EPS estimates$7,551mn / 43.8% / $4.42Previously $7,196mn / 44.0% / $4.36.
• Current share price$81.61Closing price on July 31, 2026; market capitalization of $32,163mn.

Impact & implications

If AI data center, SiC, and ESS demand continues to materialize, ON's revenue mix could shift further toward high-growth applications, while higher capacity utilization and selective pricing could improve gross margin. The extension of orders into 2027-2028 provides greater medium-term visibility, but the report does not provide a valid rating or price target, so investment decisions should also consider valuation, policy restrictions related to the acquisition, and industry cycle risks.

Risks

• AI data center demand or conversion of design wins may fall short of expectations.
• Customers placing orders early to secure supply could create subsequent risks of order normalization or cancellations.
• The lagged contribution of higher capacity utilization to gross margin could be weaker than management's framework suggests.
• The recovery in automotive and industrial end-market demand remains at an early stage and could be affected by regional seasonality and the macroeconomic cycle.
• ON's proposed acquisition of Synaptics remains subject to shareholder approval, regulatory approval, and other closing conditions.
• Morgan Stanley has investment banking and financial advisory relationships with ON, and investors should be mindful of potential conflicts of interest.

What to watch

• Whether AI data center revenue can achieve more than double year-over-year growth in 2026.
• Progress on AIDC design wins with AWS, the Nvidia MGX ecosystem, and major hyperscaler customers.
• Whether 3Q gross margin guidance of 41.0% and EPS guidance of $0.87 can be achieved, and whether 4Q can continue to improve.
• The sustainability and cancellation rate of customer orders extending into 2027-2028.
• The target of 60-70% year-over-year growth in automotive SiC revenue in 2026 and the target of approximately 40% year-over-year growth in ESS revenue.
• Progress on Synaptics acquisition approvals and potential merger-related impacts.