Benchmark has lowered its recommendation on ON Semiconductor to Hold, saying the stock's recent rally appears to have captured the initial indicators of recovery and that there are few immediate tailwinds to drive stronger growth.
The brokerage noted that the share price is trading above its $60 price target and that this level already reflects fair value, even as demand across key end markets shows signs of stabilizing. Benchmark expects margin pressure to persist in the near term and does not see a clear change in revenue trajectory until new technologies start contributing in a meaningful way - a transition the firm projects will begin around 2027.
ON Semiconductor's business remains closely tied to silicon carbide, particularly through electric vehicle demand in China. Benchmark forecasts that growth in this segment will moderate as the domestic market approaches saturation, export restrictions tighten and supplier competition intensifies. While new areas - including AI-focused data center demand, ON's Treo platform and emerging VGaN technology - represent longer-term opportunities, Benchmark does not expect these to drive a near-term lift to revenue.
Recent quarterly results, the firm said, point to demand stabilizing. Management's outlook suggests a modestly better-than-seasonal performance in the first quarter, though that view excludes roughly $50 million of expected business exits. In the automotive vertical, company leadership sees room to expand sales via greater semiconductor content per vehicle, aided by new product rollouts. Management also highlighted that automotive revenue has risen by about 70% over the past five years despite flat global vehicle production, a gain driven by higher semiconductor content per vehicle.
Benchmark highlighted VGaN as an important strategic opportunity over the long term but cautioned that it could supplant some of ON's higher-margin silicon carbide offerings over time, producing a near-term headwind to profitability. The brokerage said ON has a credible path to gross margins above 50% through structural cost improvements and stronger factory utilization, but that underused capacity is currently the primary drag.
Under Benchmark's assumptions, ON may need revenue to increase by roughly 25% from current levels before reaching full utilization. Given that gap, the firm does not expect a full margin recovery to occur until 2028 under its modeling.
For the full 2025 fiscal year, ON generated $1.8 billion in cash from operations and $1.4 billion in free cash flow, yielding a record free cash flow margin of 24%. Management reported that the company returned all of its annual free cash flow to shareholders via share repurchases.
Looking ahead, ON forecast first-quarter fiscal 2026 adjusted earnings of $0.56 to $0.66 per share, compared with a consensus estimate of $0.62. The company provided revenue guidance of $1.44 billion to $1.54 billion for the quarter, versus analysts' expectations of about $1.51 billion.
Benchmark's downgrade reflects a view that recent price appreciation has accounted for early signs of recovery while meaningful upside catalysts remain some distance off - anchored to new technology adoption and improved factory throughput that, in the firm's view, will take several years to fully materialize.
Contextual note: The analysis above is based strictly on the company results, management commentary and Benchmark's published outlook as described in the company's reports and the brokerage's assessment.