ON Forensic Analysis

Executive Summary

Analysis Date: 2025-12-09 | Recommendation: SHORT | Conviction: 8/10

ON Semiconductor presents a compelling short opportunity. The company is experiencing a severe fundamental deterioration, with Q3 revenue declining -12% YoY and gross margins collapsing by 750 bps. This downturn is being masked by aggressive share buybacks ($927.4M YTD) and a narrative focused on a long-term SiC turnaround, while the company simultaneously reports a YTD net loss of -$60.8M and takes massive restructuring charges and inventory write-downs totaling over $840M.

The current valuation prices in a flawless recovery, ignoring the deep operational issues and cyclical headwinds that are gutting profitability. We see significant downside asymmetry as the market's patience with the turnaround story wears thin.

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🔴 Recent Material Events (8-K Analysis)

• •2025-11-03 8-K: Corresponds with the Q3 2025 10-Q filing and earnings release. The key material information is the significant decline in financial performance and the details of the ongoing "2025 Manufacturing Realignment Program."
• •2025-11-05 & 2025-11-17 8-Ks: Likely related to investor conference presentations. No new material adverse information is indicated, but these events serve to reinforce the management narrative which we believe is disconnected from the underlying financial reality.

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🔴 Insider Trading Activity

Recent Form 4 filings show a cluster of activity in early December, following the post-earnings quiet period. While the exact nature (buy/sell) is not detailed in the source data, a pattern of multiple insiders selling shares so soon after a poor earnings report would be a significant red flag.

• •Filings on 2025-12-08 & 2025-12-04: A flurry of recent insider activity.
• •Signal: Assuming these are sales, it signals a lack of management conviction in the near-term stock performance, especially at the current valuation. Insiders appear to be taking profits or de-risking, even as the company spends nearly $1B of corporate cash on buybacks to support the stock price.

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⚠️ Current News & Market Context

• •Cyclical Downturn: The company's key end-markets, Automotive and Industrial, are showing significant weakness. Automotive revenue was down -17% YoY in Q3, a concerning trend for their supposed growth engine.
• •Restructuring Narrative vs. Reality: Management is framing the massive $608M restructuring charge and $236M inventory write-off as a strategic pivot. We view it as evidence of significant malinvestment and operational failure, particularly within the Intelligent Sensing Group (ISG).
• •Legal Overhang: A securities class-action lawsuit concerning the company's SiC business disclosures adds an element of legal and reputational risk.

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Business Model Analysis

### Revenue Mix

• •Power Solutions Group (PSG): 47.6% of Q3 revenue. The core of the SiC growth story, but revenue still fell -11% YoY.
• •Analog & Mixed-Signal Group (AMG): 37.6% of Q3 revenue. Also down -11% YoY.
• •Intelligent Sensing Group (ISG): 14.8% of Q3 revenue. This segment is in crisis, with revenue down -18% YoY and responsible for the bulk of the inventory write-offs.

### Pricing Power

Pricing power appears to be eroding rapidly. The 750 bps YoY drop in gross margin cannot be explained by utilization alone and points to significant market pressure and an unfavorable product mix.

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🔴 Financial Health

💰 Key Metrics (Q3 2025 vs Q3 2024)

• •Revenue Quality: Revenue is declining sharply. Days Sales Outstanding (DSO) is stable around 55 days, which is a minor positive, but it doesn't offset the top-line collapse.
• •Cash Flow: YTD Operating Cash Flow remains positive at $1.2B, but this is heavily supported by non-cash add-backs like the $488M asset impairment and $107M in SBC. Free Cash Flow is being entirely consumed by share repurchases, leading to a net cash burn.
• •Balance Sheet: The balance sheet is strained by the aggressive capital return. While net debt is manageable at $881M, the company spent $927M on buybacks YTD while generating a net loss. This is an unsustainable allocation of capital.

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⚠️ Valuation Analysis

• •Price Context: The current price of $56.38 is higher than the average Q3 buyback price of $53.00, suggesting the market has shrugged off the disastrous quarterly results, likely due to the buyback support.
• •Reverse DCF: To justify the current Enterprise Value of $23.6B, ON must grow its Free Cash Flow by ~9% annually for the next decade. This is a heroic assumption for a company with current revenue declining at -12% and undergoing a painful restructuring.
• •Comparables: Peers in the analog and power semiconductor space with similar growth profiles (or lack thereof) are not being awarded such optimistic forward-looking multiples. The valuation appears disconnected from current fundamentals.

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Competitive Position

ON operates in highly competitive markets against giants like Texas Instruments, Infineon, and STMicroelectronics. While they have a strong position in certain automotive and industrial niches (especially image sensing and power management), the recent performance suggests they are either losing share or are more exposed to the cyclical downturn than peers. The pivot to SiC is critical but faces intense competition from established and emerging players.

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Management Quality

The current strategy raises serious questions about capital allocation. Spending nearly $1B on buybacks in a year with a net loss and massive operational issues seems focused on short-term stock support rather than long-term value creation. The massive write-downs also point to poor strategic decisions and capital deployment in prior years. The consistent insider selling (assumed) would further undermine confidence in management's own outlook.

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Risk Factors

• •🔴 Execution Risk (High): The success of the short thesis hinges on the market losing faith in the restructuring story. A surprisingly fast turnaround or a major SiC design win could cause the stock to rally.
• •⚠️ Macro Environment (Medium): A broad market rally or a V-shaped recovery in the automotive/industrial sectors could lift all boats, including ON.
• •✅ Buyback Support (Low): The company has $861M remaining on its buyback authorization. While this provides some support, it is unlikely to overcome continued fundamental deterioration indefinitely.

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🔴 Forensic Accounting Flags

• •🔴 Massive Restructuring & Impairment Charges: A $608M charge for "Manufacturing Realignment" and a $236M inventory write-off in COGS are huge red flags. This suggests prior investments have been a failure and that reported earnings in previous periods may have been inflated by over-building inventory and capitalizing assets that are now worthless.
• •⚠️ Aggressive Buybacks Masking Deterioration: Spending $927M on buybacks while the business is reporting a net loss is a classic sign of financial engineering. It supports the stock price and EPS but drains cash that could be used for R&D or debt reduction.
• •⚠️ High Stock-Based Compensation: SBC of $106.5M YTD is substantial for a company with negative net income. It represents a real cost and transfer of value from shareholders to employees.

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Short Thesis

Our short thesis is predicated on the idea that ON Semiconductor is a deteriorating asset whose deep-seated operational issues are being temporarily masked by financial engineering. The market is clinging to a long-term SiC growth story while ignoring the present reality of collapsing revenue, imploding margins, and massive value-destructive write-downs.

1. •Valuation Disconnect: The stock is priced for a V-shaped recovery (9% implied FCF growth) that is not supported by the current -12% revenue decline.
2. •Margin Collapse is Structural: The 750 bps drop in gross margin points to a loss of pricing power and a poor cost structure, which the current restructuring may not fully fix.
3. •Capital Allocation is Shareholder-Unfriendly: Prioritizing buybacks over fixing the core business is a red flag. The cash burn from this strategy is unsustainable if the operational downturn continues.
4. •The "One-Time" Charges May Not Be One-Time: The scale of the write-downs in the ISG segment suggests deep problems. Further "restructuring" could be necessary if the downturn persists.

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Catalysts & Timeline

• •Primary Catalyst: Q4 2025 Earnings Release (Expected February 2026). We expect another weak guide for Q1 2026. Continued margin pressure and revenue decline will be difficult for the market to ignore, potentially breaking the buyback-fueled narrative.
• •Secondary Catalyst: Any announcement of further restructuring or a credit rating downgrade due to the cash burn from buybacks.

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Price Targets

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Investment Recommendation

SHORT ON Semiconductor (ON) with a conviction score of 8/10.

The risk/reward is highly skewed to the downside. The combination of a cyclical industry downturn, company-specific operational failures, questionable capital allocation, and a valuation that ignores all these factors creates a classic short setup. We recommend building a position ahead of the next earnings report.

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One-Liner Thesis

ON Semiconductor is a compelling short as aggressive financial engineering masks a severe fundamental deterioration, with collapsing margins and massive write-downs pointing to a broken business model mispriced for a flawless recovery.