The ONSemi (NASDAQ: ON) story today begins with a very impressive chart pattern that points to much higher share prices ahead. That pattern is Three White Soldiers and it is appearing on the weekly charts. The Three White Soldiers pattern is made up of 3 consecutive long-white or long-green candles that each close above the previous candle. The pattern is a sign of intense and sustained buying and is a well-known continuation signal.
Continuation signals are an indication the previous trend will continue, in this case, that trend is not only upward but a long-term trend represented on the weekly charts. In this light, assuming the market closes the week at or above the current levels, ONSemi stock might be reasonably expected to gain another $20 in the near to short term and then another $20 or more in the short to long term. That’s a gain of 50% and these estimates are conservative given the magnitude of price action over the last 18 months.
ONSemi Proves Position Is Everything In 2023
ONSemi results are no surprise given the results from AMD (NASDAQ: AMD) and Allegro Microdevices (NASDAQ: ALGM) last week. The two revealed that OEM and industrial demand for chips were still strong while computing, consumer-oriented and gaming-oriented demand was not. What this means is that ONSemi’s shift into the OEM auto, industrial and alternative energy markets was right on time and this is helping to drive the stock price higher.
The company produced $2.1 billion in revenue for Q4 which is only about 15% of what Intel (NASDAQ: INTC) produced but Intel (and AMD) both produced YOY revenue declines while ONSemi grew 14% and set some company records along the way. Management says Auto demand drove the business and grew by 54% YOY while the other key growth segments were also strong.
The very best news of the report is the margin. The company widened the gross and operating margins on a GAAP and adjusted basis to leave earnings up significantly versus last year and well above the Marketbeat.com consensus estimates. The $1.32 in adjusted earnings is up 19% YOY versus the 14% revenue gain, beating the consensus by $0.06.
The only bad news in the report is the guidance and even it was good enough to sustain the rally. The company is expectant Q1 revenue in a range of $1.87 to $1.97 billion versus the $2.0 billion consensus mark with comparable expectations for earnings as well. While below the consensus, the news is better than expected, given trends within the broader chip market and cash flow is in very good shape.
The company announced that cash flow in 2022 grew 22% versus the previous year and came in at 20% of the revenue. That is a substantial margin and one that may be used to fuel a dividend in the future but is now being used for growth and share repurchases.
The company also announced a new $3 billion share repurchase authorization that is worth about 9.0% of the market cap going into the release. That is yet another support for this market that will help sustain the rally.
The Technical Outlook: There Is Some Resistance To Higher Prices
The surge to new highs is being used by ON investors to take profits, and that may cap gains over the next few days or so. If it doesn’t let up and the stock fails to close near the top of the range, there is a chance it could become range bound. In this scenario, the market may move sideways until later in the year when the Q1 and Q2 reports come out. If this market can close at or near the highs of the week, Three White Soldiers is confirmed, and a march to new highs is all but guaranteed. 
