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ON Semiconductor (ON), an analog chip maker with significant exposure to the automotive and industrial end markets, has contended with persistent macroeconomic headwinds in the form of high interest rates and a cautious consumer, resulting in five consecutive quarters of yr/yr sales declines. Those challenges continued into 3Q24, but ON still managed to edge past top and bottom-line expectations as revenue grew sequentially (+1.5%) since the first time since 3Q23.

The company's struggles this year are reflected by the stock's 15% year-to-date decline and the choppy, sideways action over the past several weeks suggested that expectations were muted heading into the Q3 report. Those tempered expectations are partly a function of competitor Texas Instruments' (TXN) soft Q3 earnings report from October 22 in which the fellow analog chip maker guided Q4 revenue and EPS below expectations. During the earnings call, TXN commented that the automotive end market, outside of China, is still searching for a bottom.

• However, the EV market -- especially in China -- has received a jolt lately, thanks to increased government subsidies and aggressive price cuts from OEMs. In turn, ON's Power Solutions Group (PSG), which makes semiconductors for the EV industry and is ON's largest segment at 47% of Q3 revenue, saw revenue decline by just 1% qtr/qtr compared to the 4% drop seen last quarter.
• The improvement was even more pronounced within ON's two other segments, Advanced Solutions (AMG) and Intelligent Sensing Group (ISG). In AMG, revenue growth swung into positive territory at +1% qtr/qtr  to $653.7 mln compared to last quarter's -7% mark, while a rebound in demand for consumer electronics helped push revenue higher by 11% qtr/qtr versus -13% in Q2.
• Looking ahead, ON is bullish on its growth prospects in the AI data center space, where power usage and consumption is rising at a breakneck pace. The company estimates its total addressable market within AI data center is $4.4 bln, while growing at a CAGR of nearly 19% from 2024-2028.
• Still, the company's Q4 guidance was somewhat lackluster with the midpoints of its EPS ($0.92-$1.04) and revenue ($1.71-$7.8 bln) guidance both falling slightly below expectations. It's worth noting, though, that ON's Q3 results came in at the high end of its guidance ranges, so the company may be taking a conservative approach again with its outlook. Furthermore, its longer-term outlook, which calls for revenue growth of 10-12% on a CAGR basis through 2027, and gross margin of 53% in 2027, looks solid and is helping to offset any disappointment from the Q4 guidance.

The main takeaway is that while business certainly isn't booming for ON, it is strengthening, and the worst now appears to be behind the company. With a stock that's lower by 15% on the year, that's good enough to spark some gains today.