Today we have a speculative idea: take semiconductor manufacturer ON Semiconductor (NASDAQ: ON), to capitalize on the high demand in this area.
Growth potential and validity: 13% behind 14 Months.
Why stocks can go up: demand for semiconductors.
How do we act: we take shares now by 36,87 $.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
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And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark: as with the investment idea as a whole, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
What the company makes money on
The company manufactures semiconductor components. According to the report, by industry, its products are distributed as follows:
- automotive industry - 32%;
- industry - 25%;
- communications — 20%;
- consumer electronics - 11%;
- computer computing - 12%.
Revenue is distributed across sales channels as follows::
- distributors - 60%. Wholesale customers, who are engaged in the resale of the company's products to end consumers-manufacturers;
- producers — 34%. Company, bypassing intermediaries, sells its products directly to manufacturing companies;
- companies, providing services in the field of electronics production, — 6%.
Revenue by country and region
| Singapore | 34,2% |
| Hong Kong | 25% |
| United Kingdom | 15,3% |
| USA | 13,9% |
| Other countries | 11,6% |
Singapore
34,2%
Hong Kong
25%
United Kingdom
15,3%
USA
13,9%
Other countries
11,6%
Arguments in favor of the company
Demand, demand, demand. There is a shortage of semiconductors in the world, which greatly ruins the life of many manufacturing enterprises. In North America's auto industry alone, chip shortages are hitting production deadlines for over a million cars this year.. And as we remember from the analysis of ON reporting, the auto industry accounts for a very large share of the company's sales. So here you can wait for an influx of orders for her.. How, however, and in all other sectors - consumers of the company's products.
Also keep in mind, what is of utmost importance for the company China how it is increasing the pace of semiconductor production in China, and diligently imports relevant spare parts and equipment from abroad. Therefore, we can expect an increase in ON sales., among other things, due to growth in demand for semiconductors in China.
Although the report does not indicate the share of sales in China, the company's end users mostly work in China, as evidenced by a large percentage of ON sales in Singapore and Hong Kong. There, the production of electronics is closely tied to China., and don't forget about the high share of resellers in the revenue structure of ON. So ON may not sell many products directly to mainland China., but the company is still highly dependent on the situation with semiconductors in this country.
This area is full of indirect signs that, that things are going very well. So, Dutch semiconductor equipment maker ASML did much better today, than expected, and chip maker GlobalFoundries announced plans to build a new factory in the US.
So ON can count on an increase in orders.
What can get in the way
Do not trust anyone, even to myself. According to the report, 33% production of the company lies with third-party enterprises. This could be a problem due to logistic disruptions in the United States.: the goods may not be delivered on time or you will have to pay extra for timely delivery. However, judging by requests in Google, logistical difficulties in the US are no longer felt so acutely. However, you should still be mentally prepared for this., that reporting may be affected by increased logistics costs.
Concentration. According to the report, the company has an unnamed client, which accounts for more 10% proceeds. A change in relations with him may negatively affect the financial result of ON.
"Forget, Jake. This is Chinatown ... " Main market for the company, though not directly, - this is China. This can be a problem due to political risks.. For the American ruling circles, China's powerful demand for semiconductors is obvious - despite the fact that a significant share of the production of this valuable high-tech raw material is controlled by the Americans and their affiliated countries in Asia and Europe..
It would be in the interests of the White House to restrict the significantly increased imports of semiconductor products from the United States to the PRC in recent years., to slow the growth of China's independent semiconductor industry.
For example, now the US is preventing Dutch ASML from exporting advanced semiconductor manufacturing equipment to China. The States can also make it harder for ON, by announcing a series of bans on the export of certain products to China, which can have an extremely negative impact on the company's reporting. This must be kept in mind.
Accounting. ON has an impressive amount of debt: 4,98 billion dollars, of which 1.73 billion must be repaid within a year. She has enough money: 1,042 billion on accounts and 683.6 million debts of counterparties, yes and take the company, if anything, always can.
Nevertheless, the volume of the company's debts on the eve of the rate hike cannot but be alarming., after all, in the future, debts will become harder to service. All this can be used as an argument in favor of selling shares by investors during the next correction..
Price. The company has a relatively high P / E — 46,77, - and if the correction continues, then quotes can pat.
What's the bottom line?
We take shares now by 36,87 $. There is a possibility, that during the next 14 months of the action reached the mark 42 $ - just below their historical maximum in 43,8 $ this April. But you need to keep in mind the geopolitical risks and follow the news.
