Home Investment ON Semiconductor vs. Qualcomm: Which Semiconductor Stock Is A Better Pick?

ON Semiconductor vs. Qualcomm: Which Semiconductor Stock Is A Better Pick?

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The semiconductor shortage is hitting companies across different sectors hard as chip demand outstrips supply. Yesterday, Reuters reported that technology companies including Apple (AAPL), Microsoft (MSFT), and Alphabet Inc. (GOOGL), who are also the largest chip buyers, have entered into an alliance with chip-makers like Intel (INTC) to form the Semiconductors in America Coalition and have asked for funding for the CHIPS for America Act from US lawmakers, while US President Biden has asked Congress for $50 billion.

Automobile companies like Ford (F) are also expecting a decline in production, with operating profit to take a hit due to this chip shortage which is expected to continue through the year.

Using the TipRanks Stock Comparison tool, let us compare two semiconductor companies, ON Semiconductor and Qualcomm, and see how Wall Street analysts feel about these stocks.

ON Semiconductor (ON)

Earlier this month, ON announced its first-quarter results with revenues of $1,481.7 million, up 16% year-on-year, while it reported earnings of $0.20 per share versus a loss of $0.03 per share in the same quarter last year.

ON Semiconductor’s President and CEO, Hassane El-Khoury said, “Our gross margin initiatives are beginning to show early results with first quarter gross margin expanding by 80 basis points quarter-over-quarter. We remain confident in our ability to further expand our margins as we continue to make structural changes to the business.”

“The momentum in our strategic automotive and industrial end-markets is accelerating. During the first quarter, we secured key platform design wins for our Silicon Carbide and Silicon based power products, further solidifying our market leadership in vehicle electrification,” Khoury added.

Automotive revenues made up 35% or $515 million of the company’s total revenues in Q1.

Earlier this year, ON introduced a new range of 650V silicon carbide metal-oxide semiconductor field-effect transistors (MOSFETs) that can be used in on-board chargers of electric vehicles (EVs). The company continues to see strong demand for its silicon carbide and IGBT products later this year as global EV players launch marquee platforms.

The company has also received positive feedback on its silicon carbide traction modules due to higher efficiency, providing a better trade-off for ON’s customers between the vehicle range and the battery cost.

ON Semiconductor reports revenues across three business segments: Intelligent Sensing Group (ISG), the Power Solutions Group (PSG), and the Advanced Solutions Group (ASG). The company’s PSG group offers an array of discrete, analog, module, and integrated semiconductor products that offer different power application functions like voltage regulation and circuit protection.

In the first-quarter of FY21, the PSG group reported revenues of $747 million, up 20% year-on-year.

The ASG group designs and develops mixed-signal, analog, advanced logic application-specific integrated circuits (ASICs) and application-specific standard products (ASSPs) besides foundry and design services. These semiconductors can be used in the automotive and industrial electronics and computing industries.

In Q1, the ASG business segment saw revenues increase 14% year-on-year to $531.5 million.

ISG group designs and develops complementary metal-oxide semiconductor (CMOS) image sensors, single-photon detectors, image signal processors, and proximity sensors. These sensors have applications in automotive and industrial imaging and wireless and consumer electronics.

The ISG business saw revenues climb up 9% year-on-year to $203.2 million in Q1. ON expects the imaging sensors business to ramp up in 2022.

In the second quarter, ON expects revenues to be in the range of $1,570 million to $1,670 million, while diluted EPS is forecast to land between $0.29 and $0.38 per share. The company expects gross margin to vary from 35.8% to 37.8% in Q2.

Yesterday, the company also announced the pricing of $700 million, 0% convertible senior notes due in 2027 at a premium of 42.5% to ON’s closing price as of May 11 of $37.17. (See ON Semiconductor stock analysis on TipRanks)

On May 3, Mizuho Securities analyst Vijay Rakesh raised the price target from $40 to $44 and reiterated a Buy on the stock. Rakesh said in a research note to investors, “ON reported inline MarQ revenue at $1.48B. Compute was up a strong 54% y/y, and Auto up 16%, outpacing 1Q21 LVP of up 14%. Industrial was up 17% as ON noted global industrial activity is gaining momentum.”

“ON guided to a stronger JunQ of $1.62B (consensus of $1.49B), 9% above consensus. GM was guided to 38.6%, almost 100bps above consensus, with tailwinds from product mix and ~85%+ utilization. With its strong automotive, EV and industrial position, focus on accretive growth, tight supply, product & foundry repositioning, and an activist investor, we believe ON is well-positioned,” Rakesh added.

Shares of ON have tanked 11.6% in the past month.

Overall, consensus among analysts is a Strong Buy based on 11 Buys, 1 Hold, and 1 Sell. The average analyst price target of $45 indicates upside potential of around 23.1% from current levels.

Qualcomm (QCOM)

Qualcomm reports its revenues under three business segments. This includes Qualcomm CDMA technologies (QCT), Qualcomm technology licensing (QTL), and Qualcomm strategic initiatives (QSI). QSI is involved in making strategic investments for the company.

The QCT business develops and supplies integrated circuits (ICs) and system software that is based on technologies like 3G, 4G and 5G that can be used in a wide array of applications including mobile devices, Internet of Things (IoT) devices, wireless networks and automotive systems for infotainment and telematics.

In the second quarter of FY21, the QCT business earned total revenues of $6.3 billion, up 53% year-on-year. In this segment, the IoT industry generated revenues of $1,073 million, a jump of 71% year-on-year, while QCOM’s use of its Snapdragon processor in the mobile industry saw this industry contribute revenues of $4,065 million, up 53% year-on-year.

The technology licensing business looks at the extensive intellectual property portfolio of the company and either grants licenses or rights to use parts of this portfolio, especially in the use or sale of wireless products.

In the second quarter, QCOM saw revenues grow 52% year-on-year to $7.9 billion with diluted EPS of $1.53 per share, up a whopping 273% year-on-year.

In the third quarter, QCOM has forecast revenues between $7.1 billion and $7.9 billion while non-GAAP diluted EPS is expected to be in the $1.55 to $1.75 range. It expects the QCT business segment to generate revenues between $5.8 billion and $6.3 billion, while the QTL segment is expected to post revenues of $1.35 billion to $1.55 billion in the third quarter.

The company has forecast higher revenues for QCT as a result of the strong momentum for its products in the IoT industry and expects this industry to generate revenues of $1.3 billion in Q3. Over the long-term, QCOM views the IoT, automotive, and RF-front end industries to be key drivers of its revenues.

The company also perceives a growing demand for its products in the radio frequency (RF) front-end industry, especially when it comes to supporting 4G, 5G, sub-6 technology, or 5G millimeter wave. The company expects the deployment of millimeter-wave radiofrequency in China to be a potential key driver of long-term growth in revenues.    

As a result, the company is well on track to exceed its RF front-end industry revenue target of $3.6 billion by the next fiscal year with 5G, sub-6, and 4G technology comprising a majority of its revenues.

QCOM expects the handset and RF-front end market to be worth $10 billion and the company is likely to benefit from this industry from the next fiscal year. The company’s $1.4 billion acquisition of NUVIA in the second quarter is expected to further bolster its growth when it comes to high-performance processors. (See Qualcomm stock analysis on TipRanks)

Last month, following QCOM’s earnings, Mizuho Securities analyst Vijay Rakesh raised the price target from $170 to $175 and reiterated a Buy on the stock. Rakesh stated, “QCOM reported a solid MarQ rev/EPS of $7.9B/$1.90 and guided JunQ well above consensus at $7.75B/$1.65, reflecting QCT and high-margin QTL strength.”

“We see QCOM dominating 5G, with Snapdragon leadership, RF, QTL rebounding, and all major global handset OEMs licensed. With 5G ramps ahead, better DecQ supply, and new opportunities with Honor and China mmWave in C22.” Rakesh added.

Overall, consensus among analysts is a Moderate Buy based on 8 Buys, 6 Holds, and 1 Sell. The average analyst price target of $170.62 indicates upside potential of around 36.2% from current levels.

Bottom Line

Interestingly, while at first glance, ON and QCOM appear to operate in different business segments, they are targeting similar industries with their products. ON seems to be targeting the electric vehicle industry with its silicon carbide ICs and imaging sensors, while QCOM is looking at targeting the infotainment and telematics systems of the automotive industry.

While analysts appear to be more bullish about ON compared to QCOM, both companies seem to be positioned well for the long term. Based on the upside potential over the next 12 months, QCOM seems to be a better pick.

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