ON Semiconductor's Q4 2025 Results Confirm Stabilization Without Margin Acceleration

What happened

ON Semiconductor reported Q4 2025 revenue of $1.53 billion and non-GAAP gross margin of 38.2%, essentially flat with Q3's 38.0%, underscoring persistent pressure in automotive and industrial markets despite CEO claims of 'increasing signs of stabilization.' The company achieved a record free cash flow margin of 24% for full-year 2025, driven by cost discipline and reduced capex, but this masks underlying issues like low fab utilization and inventory charges highlighted in the DeepValue report. While non-GAAP operating margin edged up to 19.8% and EPS held steady at $0.64, these metrics remain far from the 53% gross margin target for 2027, aligning with the report's view of a slow, fragile rebound. The DeepValue analysis emphasizes that ON's structural manufacturing reset and reliance on long-term supply agreements add risk, with current valuations pricing in a clean recovery that isn't yet evident in the numbers. Overall, Q4 results validate the cyclical trough narrative but fail to show the margin expansion or revenue growth needed to shift from a cautious stance.

Implication

The stable but depressed margins in Q4 2025 indicate that ON's cost controls are containing damage but not yet driving the operational leverage required for the bull case, keeping the stock in a high-risk zone. Record free cash flow supports the aggressive $6 billion buyback plan, but as the DeepValue report warns, this could strain the balance sheet if not funded from robust FCF during a recovery, increasing downside risk. Key near-term catalysts, such as 2026 guidance, must show gross margin moving into the low-40s and auto segment revenue growth, as outlined in the report's checkpoints, to justify any upward revision. If margins remain stuck around 38% through 2026, the bear case with an implied value of $50 becomes more probable, suggesting limited upside from current levels near $60. Therefore, adhering to the DeepValue recommendation of waiting 6-12 months for clearer evidence of fundamental improvement offers better risk/reward than acting on stabilization alone.

Thesis delta

The Q4 2025 results do not shift the investment thesis; they corroborate the DeepValue view that ON is in a cyclical trough with stabilization but no imminent breakout. The thesis remains in a 'WAIT' mode, requiring evidence of gross margin sustaining above 38% and auto revenue growing at high-single digits before any upgrade to a more constructive stance.