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ON Semiconductor (ON -8%) turns off investors today with its bleak Q1 guidance, projecting earnings and revenue markedly below consensus as the automotive industry continues encountering weak electric vehicle (EV) demand. ON is a leading producer of silicon carbide semiconductors, a component preferred by OEMs in EV production due to its more efficient properties versus normal silicon, allowing for extended range.

ON cautioned last quarter that the pace of recovery in the automotive landscape would likely be gradual as the demand environment stayed muted due to ongoing inventory digestion. A similar trend was unfolding across the industrial sector, which had not broadly recovered outside a few pockets in utility-scale solar, aerospace, and defense.

• Gloomy trends from Q3 carried into Q4, leading to ON missing earnings and revenue estimates, posting $0.95 and $1.72 bln, a 14.6% decline yr/yr, respectively. Management mentioned that demand contracted late in the quarter, persisting into January.
• Regional revs fell sequentially in all geographical markets except North America, which remained flat; Japan endured the steepest decline. Non-core markets were the culprit in the sequential drop. ON's industrial revs decreased by 5% qtr/qtr, displaying weakness in the traditional parts of the business, reflecting suppressed PMI across all major regions compounded by ongoing inventory digestion. On the flip side, the automotive industry improved 8% from Q3, driven by an 18% lift in China.
• However, the upbeat gains in China are not expected to trickle into Q1 as the Chinese New Year and extended shutdown period took a bite out of January deliveries. Meanwhile, demand from every other region crumbled toward the end of Q4, carrying into Q1. In the U.S., a slower EV ramp than ON anticipated is materializing due to weak global demand. Furthermore, the looming impact of tariffs is keeping ON's customers on edge.
• As a result, ON projected bleak Q1 numbers, targeting adjusted EPS of $0.45-0.55, a 54% decline yr/yr at the midpoint, and revs of $1.35-1.45 bln, a 25% drop. On a lighter note, smaller but growing components of ON's business, including its AI data center and defense divisions, have been enjoying outsized growth lately, expanding by 40% and 50% yr/yr, respectively, in 2024. ON does not see this slowing down in 2025. Beyond this year, management continues to see electrification, AI, and renewable energy as major growth drivers.

Like last quarter, ON's business continues to feel the sting of a muted global economy, weighed down by elevated interest rates and an inflationary environment. Adding tariffs to the mix only increases uncertainty, tossing another hurdle for ON to clear over the near term. The silver lining is that ON's non-core business is relatively small. ON is also continuously shrinking the size of this portfolio. Meanwhile, the future for silicon carbide remains bright as countries shift to a greater mix of EVs, where a longer range is a must to lure hesitant ICE-loyal drivers. As such, ON could enjoy a swift turnaround once demand rebounds. The variable, however, is when this begins to take shape.