This stock has massively outperformed its peers like NVDA and ASML, Here's why
The semi-conductor industry was Wall street's darling in 2020, and 2021. But it was the most hated sector in 2022 when things turned. Company like NVDA $NVIDIA(NVDA.US$ saw a peak to trough decline of 66% which is beyond anyone would've anticipated. And of course, the whole sector went down with it. The ishares ETF SOXX $iShares Semiconductor ETF(SOXX.US$ saw a 45% decline from the top. However, with that happened to the sector, there was one anomaly, Onsemi $ON Semiconductor(ON.US$ .
In 2022, the stock only declined by just over 8% while its peers all had 20-50% drawdowns with Nasdaq fell by 32% in the meantime. So why Onsemi outperformed its peers and Nasdaq by so much in a typical bear market? Let's dive in.
The Great Pivot – Shifting to Fab-Liter Manufacturing
As we know, some companies do design only and rely on other Fabs to produce their chips. Example, NVDA design its chips and TSMC makes for them. And some companies do both design and Fabs like Intel. Onsemi belongs to the latter category. But they started to realized their manufacturing capabilities are not that superior and building Fabs requires a lot of CAPEX spending, it’s capital intense business. In 2021, they started transition to Fab-liter manufacturing meaning consolidating internal capacities and rely on external partners for common packages and technologies. What did that bring to the company? Gross margin expansion.
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The second brilliant move made by the management is to change its business mix.
In two years' time, the company has significantly increased its automotive business from 35% weight to 47% while reducing other segments like computing, consumer and communication, all of which are matured businesses and more importantly impacted massively by this last cyclical inventory correction. On the other hand, what have we heard from Automakers? We are still seeing chip shortages!!!
Now if we combine the two big shifts the management has done in the last two years, we have a company that its gross margin increased meaningfully by shifting to Fab-liter manufacturing and its business mix concentrated more to automotive which is a secular trend. The latest inventory correction almost had no impact on its business or its bottom line. The management deserved all the credit by bringing the company back into a great position over the long run and inventors applauded the action by making the stock reaching all-time-high in 2023.
Disclosure: the author does not own the stock at the time of the writing and this is not financial advice.
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