onsemi has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 11.7% to $51.02 per share while the index has gained 16.2%.

Is there a buying opportunity in onsemi, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is onsemi Not Exciting?

We don't have much confidence in onsemi. Here are three reasons why ON doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, onsemi’s sales grew at a mediocre 3.9% compounded annual growth rate over the last five years. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. Revenue Projections Show Stormy Skies Ahead

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect onsemi’s revenue to drop by 4.5%. While this projection is better than its two-year trend, it’s tough to feel optimistic about a company facing demand difficulties.

3. Low Gross Margin Reveals Weak Structural Profitability

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

onsemi’s gross margin is well below other semiconductor companies, indicating a lack of pricing power and a competitive market. As you can see below, it averaged a 42.5% gross margin over the last two years. Said differently, onsemi had to pay a chunky $57.49 to its suppliers for every $100 in revenue.

Final Judgment

onsemi isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 19.8× forward P/E (or $51.02 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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