onsemi Q2 2026: Revenue Recovery Gains Traction, But Gross Margins Remain Stuck Below 40%

What happened

onsemi's Q2 2026 revenue rose 9% year-over-year to $1.6 billion, driven by AI-related and EV/SiC demand, with non-GAAP EPS of $0.74 beating the midpoint of guidance. Gross margin improved slightly to 39.3% non-GAAP, and free cash flow quadrupled to $425 million, reflecting operating leverage as utilization trends higher. However, gross margins remain stuck in the high-30s, well short of the 45-53% range implied by 2027 targets, underscoring the slow-motion recovery thesis. The company returned 105% of FCF to shareholders via buybacks, continuing an aggressive capital allocation that leaves limited room for error if end-market demand doesn't accelerate. CEO El-Khoury highlighted strength in Treo and high-voltage power solutions, but sustained margin expansion and conversion of $11.9B in LTSAs into profitable revenue remain the real test.

Implication

The 9% revenue growth and strong free cash flow show that ON's cyclical recovery is intact, driven by AI and automotive electrification demand. Yet gross margin at 39% remains far below the mid-40s needed to justify the stock's elevated multiple of ~10x EV/EBITDA and 77x P/E. Aggressive buybacks magnify per-share growth but also concentrate risk; if demand disappoints, the stock's floor is lower without a margin safety net. We maintain our WAIT rating, wanting to see sustained gross margin above 42% and confirmation that LTSAs are converting at attractive economics before becoming constructive. Patient investors can add on dips toward $50, but chasing at current levels offers poor risk/reward given the uneven recovery and heavy reliance on capital returns.

Thesis delta

Q2 2026 results show ON’s revenue growth re-emerging and free cash flow remaining robust, but gross margin improvement remains sluggish and buybacks are outrunning organic reinvestment. The recovery is progressing, but not yet at a pace or quality that supports a rating upgrade. The WAIT stance is reaffirmed; we need to see gross margins push through 42% on a sustained basis before turning bullish.