Citi Downgrades ON Semiconductor, Cites Slowing Silicon Carbide Market

ON Semiconductor (NASDAQ:ON) shares fell more than 1% in pre-market today after Citi analysts downgraded the company to Neutral from Buy and slashed their price target to $77 from $85.

The analysts highlighted concerns over the Silicon Carbide market, which comprises 12% of ON's 2024 sales. They noted that the market is experiencing both slowing growth and declining prices, which could eventually lead to reduced margins. This change is expected to negatively impact ON’s valuation multiple as long as the Silicon Carbide business remains a significant part of its revenue and earnings.

Historically, ON's multiple expanded from 10X to 20X EPS when Silicon Carbide was perceived as a high-growth, high-margin market. However, with emerging evidence of market slowdown and pricing pressures, the analysts predict ON’s multiple will be adversely affected until the company exits the Silicon Carbide segment.

Citi also mentioned that ON’s valuation will likely trail behind its peers until it divests from the Silicon Carbide business, even if its semiconductor segment sees a rebound.