gyrations can’t make
ON Semiconductor
spin out these days. But keeping up with the electric-vehicle maker and its growing fleet of rivals still doesn’t come cheap to the chip maker. 

Tesla caused a brief moment of panic for
investors in early March when one of its executives took the stage at the company’s analyst meeting and proclaimed a new design for a coming power train that uses 75% fewer silicon-carbide chips than current models. These types of chips are better suited than standard silicon for certain use cases in EVs, such as power conversion. Silicon carbide also happens to be one of the markets that OnSemi had decided to “double down” on, in the words of Chief Executive

Hassane El-Khoury
in describing a strategic shift 18 months earlier. 

The impact was short-lived. OnSemi’s share price fell less than 2% the following day before fully recovering the next. Even the question of longer-term damage to the company’s business was far from certain, given booming chip demand from the fast-growing EV market and the fact that Tesla was talking about a car it hadn’t even built yet. Another cushion for OnSemi was a backlog of noncancelable, long-term supply agreements the company had with customers totaling $16.6 billion at the end of 2022—double the revenue the company had just reported for that year. 

Chip Maker Rides EV Market to New, Expensive Heights  at george magazine

OnSemi added $1 billion to that backlog during the first quarter. And during an analyst meeting on Tuesday, the company gave a more detailed look at how it expects its business to look over the longer term. There was a lot to like. It expects revenue to increase by an average of 10%-12% annually over the next five years, with gross margins hitting 53% by 2027. OnSemi’s shares jumped more than 4% on Wednesday morning. 

That comes after some already impressive improvements. OnSemi’s effort to prune lower-margin products and focus almost exclusively on premium chips for the automotive and industrial markets helped it generate $8 billion in revenue in 2022 with gross margins of 49%. In the five-year period before its recent strategic shift, OnSemi averaged a little over $5 billion in annual revenue with gross margins of 35%. 

Still, OnSemi isn’t fully escaping the slowdown affecting the broader chip market. Revenue is expected to decline slightly this year, as the company is exiting about $400 million of lower-margin businesses. There is also persistent worry among some analysts that the semiconductor industry’s cyclic nature will eventually hit the automotive-chip segment, where sales have remained elevated as manufacturers build up inventory. In a report Wednesday after OnSemi’s meeting,

Jack Egan
of Charter Equity wrote “we remain skeptical that the industry can avoid a downcycle after an unusually strong, multi-year upcycle.” 

There is also the risk—and expense—of building up silicon-carbide manufacturing. OnSemi’s acquisition of GT Advanced in 2021 has made it the only vertically integrated chip company in this space, producing everything from the initial boules and substrates to the finished chip products. But silicon carbide is a challenging material to work with and expensive to produce. OnSemi’s capital expenditures topped $1 billion last year—more than twice the company’s average over the previous five years. And the company said Tuesday that it expects capex to be in the range of 15%-20% of revenue through next year, and to drop to 11% by 2027. Capital expenditures have typically averaged 8% of OnSemi’s annual revenue. 

Those investments should pay off as the auto industry’s shift to EVs is hardly a fad. OnSemi Chief Financial Officer

Thad Trent
says the company has about $17,000 of chip content in an EV, compared with $50 in a combustion car.

Ross Seymore
Deutsche Bank
wrote in a report Wednesday that OnSemi’s new focus should prove “structurally sustainable” and result in superior earnings and free cash flow. 

Life for this chip maker will likely stay in the fast lane. 

Write to Dan Gallagher at [email protected]