ON Semiconductor Q4 Beat Signals Tentative Stabilization, But Margin Recovery Remains Unproven

What happened

ON Semiconductor reported Q4 2025 earnings exceeding the midpoint of guidance, with management citing improving order trends across automotive and industrial markets as a sign of cyclical stabilization. This aligns with the DeepValue report's base case of a gradual recovery, but the company remains in a structural reset phase, having executed cost actions and portfolio changes aimed at margin expansion. However, the report highlights that non-GAAP gross margins are still depressed around 38%, far from the 42%+ levels needed to justify the current rich valuation and aggressive $6B buyback program. Persistent risks include fragile long-term supply agreements, underutilization of SiC capacity, and execution challenges in a competitive landscape. While the earnings beat offers a glimmer of hope, it does not yet provide the clear evidence required to shift from a cautious 'WAIT' stance to a more bullish outlook.

Implication

The earnings exceeding guidance suggests the cyclical trough may be bottoming, yet it fails to address the core concerns outlined in the DeepValue report, such as the need for gross margins to move sustainably into the low-40s. Improving order trends are encouraging, but they must translate into higher fab utilization and margin leverage, which remain uncertain given ongoing auto/industrial weakness and potential LTSA amendments. Cost actions and portfolio changes are necessary for long-term health, but they come with execution risks and could be offset by competitive pressures in SiC and AI power markets. The $6B buyback authorization, while signaling confidence, raises questions about capital allocation if funded excessively without underlying profit recovery, potentially straining the balance sheet. Therefore, investors should adhere to the report's recommendation to wait for clearer evidence over the next 6-12 months, such as gross margins consistently above 38% and sequential auto revenue growth, before reassessing the risk/reward profile.

Thesis delta

The Q4 earnings beat and improving order trends provide incremental support for the base case of a gradual recovery, but they do not materially alter the thesis that ON remains overvalued with limited margin of safety. Key thresholds for upgrading—sustained gross margin above 42% and high-single-digit auto revenue growth—remain unmet, reinforcing the need for patience as outlined in the DeepValue report's 6-12 month re-assessment window.