Morningstar | Narrow-Moat ON Semiconductor Benefit from ADAS, 5G, and Electrification; Initiating with $28 FVE
ON Semiconductor is a large supplier of semiconductors for the automotive and industrial markets, with a solid share of the power discrete market. We believe its portfolio of products will benefit from secular growth trends around advanced driver-assist systems and autonomous driving, electrification, and increasing connectivity. The firm’s portfolio of analog, image sensing, and power discrete products is on the narrower side, but we think it has sufficient tools to benefit from this rising tide. With the firm’s improved manufacturing scale and solid exposure to sticky growth markets, ON Semiconductor warrants a narrow moat rating. That said, because of its dependence on commoditized products and the strength of competitors in the more differentiated areas the firm is pursuing, we assign ON Semiconductor a high uncertainty rating.ON Semiconductor is well-placed to benefit from the content growth in the automotive market as well as the increasingly complex power and connectivity needs of industrial, data center, and communications infrastructure markets. The most attractive of these is the area of transportation. We expect the firm’s suite of power solutions should help facilitate hybrids, electric vehicles, and the requisite charging infrastructure. Its power management, image sensing, and lidar products should also give it a strong foothold to realize emerging opportunities in assisted safety and fully autonomous vehicles. The lack of microcontroller products may prevent it from deriving the same margins as large competitors for many of these attractive markets, but we believe the firm’s combination of moat sources will keep it earning excess returns over the next decade.ON Semiconductor purchased Fairchild Semiconductors in 2016, which significantly increased the firm’s discrete portfolio while making it the number-two player in the market behind Infineon. With the increased scale, ON Semiconductor can spread its costs across a larger, more diverse customer base. We think this move is replicable by consolidation of other discrete players in the next decade, but it would take more than five years to materially erode its cost advantage.ON Semiconductor is engaged in energy efficient electronics. The company is organized into three segments: Power Solutions Group, which provides a range of discrete, module and integrated semiconductor products; Analog Solutions Group, which designs and develops analog, mixed-signal, and advanced logic application specific integrated circuits and Application Specific Standard Product, and power solutions; and Image Sensor Group, which designs and develops complementary metal oxide semiconductor and charge-coupled device image sensors, as well as proximity sensors, image signal processors and actuator drivers for autofocus and image stabilization for automotive and industrial markets, among others.
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