ON Semiconductor Outlines 2027 Growth Targets Amidst Market Transition

Strategic Reorientation Underpins ON Semiconductor's 2027 Projections

ON Semiconductor Corporation (NASDAQ: ON) has articulated ambitious growth targets for fiscal year 2027, signaling a strategic reorientation aimed at driving substantial capital appreciation. The company's management indicates that successful execution of its long-term strategy could lead to a potential tripling in shareholder value, anchored by a significant shift towards higher-margin automotive and data center end markets, coupled with comprehensive portfolio and operational restructuring. This outlook comes as the company navigates a period of short-term market softness, particularly within its industrial segment.

Detailed Financial and Operational Outlook

ON Semiconductor recently provided promising FQ3'25 guidance, suggesting a sequential improvement following a H1'25 bottom. Despite this, FY2025 is widely anticipated to be a trough year for the company, with substantial improvements in both top and bottom lines projected to commence from FY2026 onwards. The strategic pivot involves shedding lower-margin businesses to concentrate on sectors with robust growth potential. Key financial targets for FY2027 include a Compound Annual Growth Rate (CAGR) for revenue between 10% and 12% from 2022, approximately three times the forecasted growth of the broader semiconductor market. Gross margin is targeted to reach 53% by 2027, up from 45.4% in 2024, driven by new product introductions and the ramp-up of its Silicon Carbide (SiC) technology at accretive margins. Additionally, the company aims for an operating margin of 40% and a free cash flow margin between 25% and 30% by the same year.

Market Reaction and Valuation Context

The market's reception to ON Semiconductor's strategic direction has been mixed in the short term, with the stock experiencing a trading bottom at an April 2025 floor of $35.24. This recent retracement follows a period where the stock was considered expensive and overbought in June 2025, despite early monetization in its data center offerings and the bottoming of automotive and industrial end markets. The company's Q3 2025 earnings reflected a 19% year-over-year revenue decline and a 48% drop in gross profitability for its Power Solutions Group (PSG), a direct consequence of underutilized manufacturing capacity and depressed pricing in a challenging automotive market. However, analysts now view ON as a "deep value Buy opportunity" due to its current cheap valuations, trading at slightly over 14 times the Wall Street consensus for free cash flow in 2025. This valuation implies a margin of safety and significant long-term growth potential, positioning it as a contrarian investment amidst a market often less lenient on late entrants to high-growth sectors compared to established AI market leaders.

Broader Context and Strategic Imperatives

ON Semiconductor's strategic shift is deeply rooted in secular megatrends. Within the automotive sector, which constituted 55% of its 2024 revenue, the company is doubling down on vehicle electrification, Advanced Driver-Assistance Systems (ADAS), energy storage, and charging. The automotive semiconductor market is projected to expand to $117 billion with an 8.9% CAGR over the next five years. For the industrial segment (25% of 2024 revenue), targets include autonomous mobile robots and machine vision. The AI data center market represents a significant growth vector, with a Total Addressable Market (TAM) of $4.4 billion and an expected CAGR of nearly 19% from 2024-2028. The acquisition of Vcore Power Technologies and its related IP further strengthens ON Semiconductor's power management portfolio for this rapidly expanding sector.

Silicon Carbide (SiC) technology is a cornerstone of this strategy, with ON Semiconductor aiming to capture 35-40% of the SiC market by leveraging its end-to-end supply chain. This includes the acquisition of Qorvo's Silicon Carbide Junction Field Effect Transistor (SiC JFET) business, which is expected to unlock a $1.3 billion TAM opportunity. Operational efficiency is being enhanced through a transition from a "Fab Liter" to a "Fab Right" strategy, optimizing its asset footprint and lowering its 2027 capital intensity to a mid-single-digit percentage. The East Fishkill fab plays a central role in this, converting production from 8-inch to 12-inch wafers to increase SiC output without new fab construction.

Looking Ahead

Management anticipates a gradual improvement in market conditions during the second half of the year, with enhanced visibility and stabilized inventory levels contributing to a resumption of growth into 2027. The broader semiconductor market is projected to surpass $1 trillion by 2030, driven by innovations in AI and electric vehicles. ON Semiconductor plans to return 100% of its free cash flow to shareholders through share repurchases, forecasting $700 million in 2025, $800 million in 2026, and $1 billion in 2027. Investors will closely monitor the company's execution of its restructuring initiatives and its progress in scaling its automotive and data center offerings, particularly its SiC technology, as these factors will be crucial in realizing the projected long-term capital appreciation.