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ON Semiconductor (NASDAQ:ON) shares fell more than 5% in premarket trading on Wednesday as investment firm William Blair downgraded the chip company, citing worries over silicon carbide yields and automotive demand.
Analyst Jed Dorsheimer lowered his rating on ON Semiconductor (ON) shares to market perform from outperform, noting that the recent increase in cost of capital “globally undermines” William Blair’s confidence in the auto and industrial markets that are served by ON’s (ON) traditional silicon business.
“Our research suggests that [ON Semi] continues to struggle with GT Advanced Technologies, and in particular, we believe the company’s [silicon carbide] yields are half our original assumptions in our [silicon carbide] supply/demand model,” Dorsheimer wrote in a note to clients.
Dorsheimer added that with the combination of a weakening traditional business and lower silicon carbide yields, ON Semiconductor’s (ON) gross margins could fall to 45% or below.
Delving deeper, Dorsheimer noted that silicon carbide yields at GT Advanced Technologies could be as low as 15% to 20%, half of the 30% that was initially estimated. That could be an issue for ON Semiconductor (ON) and its supply agreements with other companies, including Tesla (TSLA). And given that much of its wafer supply for automotive is already spoken for, the company is stuck between a “rock, hard place, and another harder place,” Dorsheimer suggested.
The way he sees it, ON Semiconductor (ON) has three options: they can make up for low yields with higher internal volume, shorten cycle times and put more cash into furnaces; they can extend their existing long-term supply agreements with Wolfspeed (WOLF) or Rohm; or they can miss production targets and jeopardize their agreements, viewed as the most unlikely.
On Friday, Citi said that ON Semiconductor (ON) was the “most bullish” company it spoke to at CES this year.
Analysts are universally positive on On Semiconductor (ON). It has a BUY rating from Seeking Alpha authors, while Wall Street analysts rate it a BUY. Conversely, Seeking Alpha’s quant system, which consistently beats the market, rates ON a STRONG BUY.
