ON Semiconductor stock extends rally as BofA upgrade flags upside potential

Shares of ON Semiconductor extended their recent rally, rising sharply as investors reacted to a bullish upgrade from Bank of America, even as questions remain about the timing of the call.

The stock climbed 8% on Thursday, marking its ninth consecutive session of gains, making it a 14% gain this week so far.

The move comes amid a broader market uptrend, with the S&P 500 and the Dow Jones Industrial Average gaining 0.13% and 0.08%, respectively.

Despite the recent surge, ON Semiconductor shares are still about 25% below their record highs from July 2023, though they have gained roughly 38% so far this year.

BofA upgrade lifts sentiment despite caution

The rally follows a rating upgrade from Bank of America analyst Vivek Arya, who lifted the stock to Buy from Neutral and raised the price target to $85 from $70.

Arya acknowledged that the upgrade might be premature given current industry conditions, noting that slowing demand in key segments such as autos and electric vehicles remains a headwind.

He wrote that weakening demand in these areas makes the ON Semiconductor “upgrade potentially a tad early,” but emphasized that he remains constructive on the company’s longer-term outlook.

“There is catch-up potential,” Arya wrote, citing the slowdown in EV demand as a major reason the stock price has come down in the past three years.

“However, ON has responded well by pruning its portfolio, cutting costs, and focusing on free cash flow generation/returns. The company has also invested in boosting its AI power exposure, likely a focus at upcoming analyst day in September, a potentially positive catalyst,” Arya added.

Mixed demand backdrop across semiconductors

In a broader assessment of the semiconductor sector, Arya highlighted a mixed demand environment.

Strength is emerging from data centers and artificial intelligence, along with aerospace and defense, while traditional end markets remain under pressure. Demand from automakers and electric vehicle manufacturers has softened, and consumer electronics are facing headwinds from rising memory costs.

This divergence has created an uneven recovery across the industry, with companies tied to AI infrastructure benefiting more than those exposed to cyclical consumer and automotive segments.

Additional data points also suggest tightening supply conditions in certain areas. According to Baird, lead times across semiconductor segments have been increasing, with ON Semiconductor’s MOSFET products seeing lead times of around 26 weeks.

Strong fundamentals support long-term outlook

Despite near-term demand challenges, analysts point to ON Semiconductor’s improving fundamentals as a key reason for optimism.

The company’s pipeline includes exposure to AI power solutions and Treo products, while its focus on free cash flow generation and shareholder returns has strengthened investor confidence.

Bank of America also highlighted the company’s commitment to a $6 billion share buyback program over the next three years, underscoring its capital return strategy.

As the semiconductor cycle evolves, ON Semiconductor’s ability to balance cyclical pressures with structural growth opportunities will likely determine whether its recent rally can be sustained.