ON Semiconductor (ON) Is Winning in AI Power. I’m Still Not Chasing the Stock

ON Semiconductor’s (ON) Q1 2026 earnings report delivered on May 4 serves as a definitive signal that the cyclical trough for power semiconductors has passed. It reinforced the idea that the power semiconductor cycle may finally be turning higher, particularly as demand for artificial intelligence (AI) infrastructure accelerates. While the broader analog semiconductors sector has struggled with persistent inventory gluts, ON is successfully decoupling from the laggards by pivoting toward the generative AI infrastructure build-out.

An investment thesis on Onsemi stock today narrows down to two conflicting data points. Persistent volatility in electric vehicle (EV) adoption weighs on ON Semiconductor’s largest business line — automotive semiconductors. However, there’s a massive, high-margin surge in the demand for Onsemi’s AI data center power semiconductors. While bears may argue that cooling EV demand in Western markets will cap top-line growth, bulls point to the recent 30% sequential increase in AI data center revenue as a transformative catalyst. Management expects this hot segment to double in 2026.

My Hold rating on Onsemi stock reflects the semiconductor giant’s ongoing margin expansion as it transitions from a legacy automotive-heavy business to a diversified power-efficiency leader. However, a 90% rally in ON stock so far this year takes valuation multiples beyond the trough, yet the business still shows some scars from a slow-growth automotive market.

Two Pillars Supporting Bullish Call on Onsemi Stock

A fundamental bull case for ON stock rests on two key pillars: the accelerated ramp of AI power stages and a structural moat provided by Onsemi’s EliteSiC platform.

In the data center vertical, the shift toward liquid-cooled, high-density server racks supporting next-generation Nvidia (NVDA) graphics processing units (GPUs) has more than tripled the power requirements per rack. ON’s integrated power modules and point-of-load (POL) solutions are essential for maintaining energy efficiency in power-hungry AI data centers. Management’s latest projections suggest that the data center vertical isn’t just a temporary revenue bump but a multi-year secular tailwind, with Onsemi growing its revenue opportunity per rack from $15,000 today to $115,000 by 2030.

Simultaneously, ON continues to dominate the silicon carbide (SiC) landscape. During the Q1 2026 earnings call, CEO Hassane El-Khoury highlighted the company’s strong momentum at the Beijing Auto Show (Auto China), which concluded on May 3. Despite headlines about softness in the global EV market, Onsemi continues to expand its footprint in China. He stated that Onsemi’s Silicon Carbide (SiC) solutions were designed into approximately 55% of the new electric vehicle models debuted at the event

The company’s vertical integration, spanning from substrate growth to final module assembly, provides a cost advantage that non-integrated peers simply can’t match right now. The ongoing transition to 200mm SiC may drive a 30% reduction in die cost over the next 24 months, boosting Onsemi’s margins or improving its pricing flexibility in a competitive market.

The Numbers Are Promising

Finally, the “Fab Right” strategy, initiated in late 2020 by then-new CEO Hassane El-Khoury, is nearing its final stages. By decommissioning sub-scale 150mm legacy fabs and concentrating production in highly automated 300mm facilities like East Fishkill, and outsourcing some fab processes, ON is structurally resetting its gross margin floor and freeing up heavy recurring capital expenditures.

Higher operational efficiency may allow the company to remain profitable even during periods of lower capacity utilization, a feat that was impossible during previous industry cycles. Improvements in gross margin and free cash flow (FCF) margin support a revaluation of ON stock to higher multiples. Onsemi reported Q1 revenue of $1.51 billion, up 5% year-over-year, and non-GAAP earnings per share of $0.64, both comfortably exceeding the midpoint of management’s prior guidance.

Could AI Sales Mask Persistent Challenges in Legacy Markets?

While management is confident that the cyclical market is entering a growth phase with improvements in channel orders, Onsemi’s first-quarter sales were lifted by a 14% year-over-year surge in its Power Solutions Group (PSG) segment, potentially driven by surging AI-related revenue. Otherwise, Analog & Mixed-Signal (AMG) segment sales fell 5% year-over-year, accounting for 35.7% of total quarterly revenue. A 1% annual growth in the Intelligent Sensing Group (ISG) segment revenue wouldn’t have reversed the AMG segment’s decline.

That said, zooming into Onsemi’s end-market revenue disclosures paints a more interesting picture. For the first time in seven consecutive quarters, ON saw its Automotive, Industrial, and Others end markets grow 5%, 4%, and 5%, respectively. The era of double-digit declines in automotive end-market sales is finally over.

While quarterly revenue in the Industrial and Others end markets turned to growth during Q4 2025, with Industrial up about 4% quarter‑over‑quarter and 6% year‑over‑year after eight quarters of declines, automotive sales stabilized and posted modest sequential growth for the first time since the downturn began. That’s encouraging, and it suggests the cycle may finally be turning, though management so far describes the trend as stabilization rather than a confirmed bottom‑to‑top rebound.

What Does the Valuation Look Like?

From a valuation perspective, ON Semiconductor stock trades at a small discount to its peer group despite a near-90 % year-to-date rally. At approximately 34.97x forward non-GAAP earnings, the stock is slightly below Texas Instruments (TXN), which currently commands around 36.3x forward multiple despite slower projected growth in the AI power segment.

That said, ON stock’s non-GAAP forward P/E has rapidly expanded from a five-year average of 18x, potentially putting the valuation far ahead of the business’s fundamentals. Investors heavily favor non-GAAP multiples here because Onsemi’s GAAP performance was weighed down by $329.3 million in restructuring and asset impairment charges in Q1 2026. These heavy special items dragged Onsemi into a GAAP net loss of $33.4 million or -$0.08 per share for the quarter, leaving its GAAP operating margin at 3.5%.

In contrast, peers like TXN consistently post positive GAAP earnings, which naturally helps them command more stable premium valuations.

Onsemi’s stock cash flow growth outlook is particularly compelling, though. Following its recent Q1 2026 update, ON is on track for a FCF run rate potentially exceeding $2 billion annually, up from $1.4 billion in 2025 — the year when management celebrated a record free cash flow margin of 24%. Cash flow growth is supported by a stabilization in capital expenditures as the heavy lifting for the “Fab Right” facility upgrades is largely complete.

With a net debt-to-EBITDA ratio below 1x, ON’s balance sheet is a fortress, allowing management to splurge 100% of free cash flow on share repurchases. The company is aggressively utilizing its $6 billion share repurchase program. Aggressive buybacks would be accretive to 2027 earnings. That said, share repurchases would have been more impactful had ON stock “delayed” its 90% year-to-date rally a bit.

The Bear Case and Risks

The primary risk to the ON stock investment thesis remains the “L-shaped” recovery in the industrial sector. While AI is booming, traditional industrial automation and renewable energy components are still clearing excess inventory. If this digestion period extends into late 2026, it could weigh on total revenue growth.

Additionally, geopolitical risks in the SiC market can’t be ignored. Domestic Chinese semiconductor players are aggressively expanding SiC capacity, backed by state subsidies. This could lead to pricing erosion in the 650V to 1200V range, particularly for commodity-grade automotive modules.

Finally, sustained high interest rates and removals of government incentives in some markets continue to pressure consumer financing for premium EVs. If Western automakers further delay their electrification roadmaps, ON may face a temporary gap in its SiC utilization rates before the AI data center vertical reaches sufficient scale to fully compensate for the automotive shortfall.

Is ON Semiconductor Stock a Buy?

According to TipRanks data, ON Semiconductor stock retains a Moderate Buy rating on Wall Street based on 13 Buys and 13 Holds issued by analysts during the past three months, and updated post recent earnings. An average analyst price target of $101.17 implies a 1.97% potential downside on ON stock over the next 12 months.

Conclusion

In my view, Wall Street is raising its price targets for ON Semiconductor stock following ON’s parabolic surge. There isn’t much near-term upside left in the stock, as current target prices show. The stock is therefore a Hold from my end. However, I’d be willing to be positively surprised as ON stock continues to be reclassified from a “cyclical car chip” maker to an “AI power infrastructure enabler.”

Historically, companies that undergo this type of stock market “rebranding” experience a significant re-rating of valuation multiples. ON’s multiples have been reset, but the business is still predominantly a low-margin industrial components provider. Let’s see if high-margin AI revenue and a lower cost base fundamentally rejuvenate the entire GAAP earnings statement in the coming quarters. Until then, ON stock is a Hold from my end.