ON Semiconductor, STMicro, Diodes cut to neutral at Baird on supply, demand issues

ON Semiconductor (NASDAQ:ON), STMicroelectronics (NYSE:STM) and Diodes (NASDAQ:DIOD) were all downgraded at Baird on Tuesday, as the investment firm cited worries about supply, demand "normalization."

Analyst Tristan Gerra lowered his rating on all three semiconductor firms to neutral, noting that while pricing is "stable," lead times in silicon carbide suggest that there is a "structural oversupply" that could occur as soon as next year, resulting in inventory adjustments. There are also concerns about 8-bit microcontrollers and metal oxide silicon field effect transistors, Gerra explained.

"As allocation fears dissipate, inventories are poised to decline, bringing more cancellations with likely negative implications for pricing, which we believe will eventually settle at pre-COVID levels, thus resulting in gross margin declines," Gerra wrote in an investor note.

ON Semiconductor and Diodes shares fell in pre-market trading while STMicro rose nearly 2%.

Looking ahead, Gerra sees continued weakness in various end markets — including in industrial and automotive — and rather than a recovery in the second-half of 2024, it's likely that the back half of next year could see "worsening inventory and pricing reductions."

"Net, we are taking a more defensive posture into next year, avoiding broad-based cyclical names despite structural mix improvements, as the last bastions of strength (industrial, automotive) are weakening," Gerra added.

On Monday, ON Semiconductor (ON) shares plunged after its fourth-quarter guidance badly missed estimates, with some analysts suggesting Tesla (TSLA) may be to blame.

Analysts are largely bullish 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.