Chip-manufacturing specialist ON Semiconductor (NASDAQ:ON) may be one of the strongest performers this year, gaining over 30% year-to-date. Still, one analyst sees bigger and better things for ON stock, eventually hitting $100 from chip demand for electric vehicles. Heading into the weekend, shares gained slightly above parity against Thursday’s close.
According to a CNBC report earlier this morning, Bank of America analyst Vivek Arya reiterated his buying rating on ON stock in a Friday research note to clients. Fundamentally, Arya anticipates strong tailwinds as EVs require more chips to operate.
“We see ON as a top-3 global/top US vendor of smart power and sensing chips for EVs, charging/storage infra, autonomous vehicles and factory automation,” the analyst wrote. Demand from the EV sector may eventually yield 8% to 10% compounded annual revenue growth. On the profitability side, ON stock investors may enjoy mid-teen earnings per share growth.
Per CNBC, the present enthusiasm for ON stock centers on investors rolling back into the technology trade. As well, falling bond yields helped alleviate some pressure on the sector. Arya’s subsequent $100 price target implies about 24% upside potential.
Bullishness in ON Stock Intrigues But Also Presents Risks
Other reasons that the BofA analyst endorses upside for ON stock include “…a strong balance sheet, growing free cash flow margins and solid management team.” Also, the expert states that ON trades at a compelling valuation. Data from Gurufocus reveals that the market prices ON at a forward multiple of 17.1. For comparison, the forward multiple for the semiconductor industry is 21.31.
Moreover, ON stock may benefit handsomely from the underlying silicon carbide industry. Per CNBC, “[t]he chemical is commonly used to make more efficient, longer-lasting chips for electric vehicles. The company continues gaining share in this industry, with Bank of America projecting it could capture 30% to 35% long term.”
However, the business news agency also points out that the narrative isn’t without concerns. On a broader scale, the “…backdrop of sluggish macro that could hinder auto demand and a potential inventory correction.” Additionally, a largely Tesla (NASDAQ:TSLA) sparked EV sector price war threatens to disrupt the industry. Over time, the sector could see consolidation, which may impact semiconductor demand.
Speaking of Tesla, CNBC reported that the company plans to reduce silicon carbide use. Still, Arya remains optimistic, stating that ON stock represents one of the “best growth prospects” across auto and industrials.
Why It Matters
According to TipRanks, Wall Street analysts currently peg ON stock as a consensus moderate buy. On average, their price target lands at $93.38, implying a 16% upside. And while Arya’s call may be bold, it’s not the boldest. So far, that honor goes to Needham’s Rajvindra Gill, who 11 days ago forecasted a $110 price target.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
