ON 持仓维持不变；在消化 Synaptics 收购带来的杠杆与整合风险期间，预计该股将波动并区间震荡。

Before we begin today's video on On Semiconductor and the company it is acquiring, Synaptics,

Let's just use a slide right now from fiscal.ai showing a breakdown of On Semiconductors stock performance since the beginning of 2023 and how badly it has underperformed some of its peers.

Now, before we talk about On Semiconductor specifically, the deal with Synaptics, On Semi's Investor Day, that we recently talked about actually over on Semiconductor Insider in recent weeks.

The reason why I'm showing it is we own both On Semiconductor and Monolithic Power, and obviously Monolithic Power has far and away been the better performer.

That has been one of the reasons why Infineon and On Semiconductor have underperformed. Those markets are still stabilizing, and many of them have yet to return to really robust year-over-year growth, and they have manufacturing facilities that are not operating at optimum capacity.

So I wanted to tee that up. With that out of the way, let's talk about On Semiconductor. And first we need to address the not so recent acquisition of Synaptics that was announced, but the more recent update to the terms of that acquisition.

The short story was Onsemi was going to be paying a combination of cash and stock. But at the time they announced that Onsemi was like $120 plus per share. Market didn't like it.

The stock sold off hard, and in the midst of all of that, Synaptics received another offer from another undisclosed third party.

So Onsemi has switched this to an all cash deal, $5.7 billion. Prior agreement was worth $7 billion, but because of the stock component, Onsemi was going to issue new stock for Synaptics shareholders.

That becomes a variable part of the deal, and so all cash adds security for Synaptics shareholders. They know exactly what they're going to get.

And after this was updated last week, the market rewarded both companies with a run higher. On Semi's CEO, Hassane El-Khoury, also said in the announcement that as they were going through more of their diligence and looking over this deal, they've identified other synergies beyond the original 200 million run rate of synergies between On Semi and Synaptics, and one of those, here towards the bottom of this quote, involves insourcing a portion of Synaptics production.

Synaptics is a fabless company, so that alone means it is a very different type of company from On Semiconductor, which is an IDM. They have engineering teams, design teams, and manage their own facilities.

So this is On Semi doing what a lot of IDMs have been doing in recent years and using a hybrid approach. I'm gonna come back to this in just a moment, but just a notable little item here, because the cash portion of this deal is going to run up the debt On Semi has on balance.

They already took out some additional loans in the previous quarter.

Almost three point nine billion in total cash and equivalents. Total debt though of about $4.4 billion, so they're going to be funding this $5.7 billion takeover from Synaptics with a combination of cash they have on balance and also taking out some additional debt to fund the deal.

Now, Synaptics itself at a five point seven billion valuation at the most recent offer isn't a huge mega merger, but it's a large one relative to On Semiconductor's size.

So taking on that extra debt, integration risk is a real factor. The leverage that they're taking on is a risk factor for On Semi shareholders, something to keep in mind.

And the ultimate result of this is we think On Semiconductor could remain basically range bound for a while as they kind of work through the deal, work off some of the debt, the leverage that they're taking on, and prove that acquiring Synaptics is actually a good thing.

We'll see how that plays out, but we would expect some very volatile, but ultimately range bound action for the stock. So that's the deal with Synaptics. We'll come back to this in a moment, but let's backtrack here to the recent Investor Day update because the original outlook, CEO Hassane El-Khoury, CFO Thad Trent, and the management team had provided a number of years ago was displayed here.

This is an old slide from back in early 2024 as they were wrapping up calendar year 2023 financials. They had provided these targets for 2027. 2027 is fast approaching, but these targets are for full year 2027. 10 to 12% compound average growth rate for revenue.

They were looking at 53% gross margin, operating expenses being 13% of revenue, resulting in an operating margin of around 40%, and keeping capital expenditures in check after they doled out quite a bit of CapEx during the last semiconductor boom, including for silicon carbide.

On Semi is still one of the leaders in silicon carbide. They're vertically integrated there. And a free cash flow margin of 25 to 30%. The last few years have not been easy for On Semiconductor, though.

We had a pretty sizable and prolonged downturn after the analog chip shortage, due to automotive and industrial and some data center equipment upgrades during the pandemic years.

It lasted through roughly the end of 2022, early 2023, before falling off a cliff.

And based off the 2025 full year actuals in this chart, you can see we are not actually going to hit those targets more than likely, unless 2027 ends up being a real knockout year for On Semiconductor, thanks to some new data center products like high voltage AI data center architectures that will begin deployments in 2027.

2025 full year revenue of six billion, gross margin thirty-eight percent. Operating margin at 18.6%. The one thing that has actually done really well is free cash flow. Last year came in at nearly 24%.

They've controlled those capital expenditures as they've adopted more of a hybrid fab strategy utilizing some outsourced manufacturing. So that has actually done really well.

And now in the midst of this, we have this investor day update. There in the middle column are the full year 2026 estimates for management. Again, not a huge run higher from 2025.

Revenue expected to be six and a half billion. And pretty much all of the profitability metrics I just showed you are going to fall short this year. Again, it's not even 2027 yet.

Maybe there will be some really, really big increases next year as some new AI data center products start to positively benefit sales.

But the one thing that has done really well is the free cash flow expected to be at 25 percent. So at the very least, despite everything else being amiss, free cash flow margins will hit that original target.

But there in the right column, we are now pushing out those estimates that we previously had out to the year 2030. This is for On Semi on a standalone basis. It does not include Synaptics.

The revenue growth CAGR did get bumped up a bit, expected to be in a range of twelve to fourteen percent. And let's say everything else roughly stays about the same. The one thing that is different, operating margin dropped down to about thirty-eight percent and capital expenditures also decreased to approximately five percent of revenue, which means an expected higher free cash flow profit margin now in the range of thirty to thirty-five percent.

Again, these are 2030 targets from the top team at On Semiconductor.

Here's just a look at a financial chart from fiscal to show that yes, we're still pretty far off from those targets that were originally communicated for calendar year 2027. The company's return to growth has been pretty sluggish even compared to some of its peers like Infineon, which we showed you earlier and is really important to keep in mind because On Semi itself called Infineon out as its closest peer, the company with the broadest range of power and sensing products spanning multiple industries.

But because both companies, Infineon and On Semi manage their own fabrication facilities, profitability also has been lagging behind. They've incurred some cash and non-cash expenses related with idle manufacturing capacity.

And a look at those operating profit margins and free cash flow profit margins here. Free cash flow conversion has been pretty good through this period. Management has at least done a good job with that even though sales have not worked in their favor.

They have at least been able to get the company in a pretty profitable position using their Fab-Rite strategy. Basically mixing in more hybrid manufacturing, offloading fabrication facilities that they don't need, some products that are not differentiated and below the company's profit margin targets.

And so at least there's that. Even though GAAP operating margin has been lackluster, free cash flow has actually been pretty good.

Okay, now back to Synaptics here for a minute, because this is not included in the new targets through 2030. And the benefit of adding in Synaptics is it is a fabless business, and so across the board, you would expect to see higher profit margins.

And additionally, at least on a backwards-looking basis, Synaptics has been slightly quicker to recover business, and the expectation is their revenue growth will outpace On Semi's just a bit.

So more growth, better profit margins, operating profit margin of over thirty percent from that fabless operation.

And so the expectation here, the two companies combined will be a good pairing. Now, we need to talk about this here just a moment before we wrap up this video because on Semi said in this most recent update, making the deal for Synaptics all cash five point seven billion, that they will actually in fact be able to handle some of those manufacturing needs for Synaptics products.

What I can ascertain from this, what they'll be insourcing is perhaps some advanced packaging of the chips. We talked about this on Semi Insider a few weeks ago, and then this update comes out and they said they can handle some of that manufacturing for Synaptics. That would be my guess.

On Semi has built some capabilities in putting together chiplet architecture. For example, they have a vertical GaN product where I imagine they'll be taking chiplets like their power and sensor portfolio and packaging it up with some logic like what Synaptics does, maybe even beyond some of their traditional products, and there will be some cross-selling of those and providing customers with some sort of more full system solution using both. That would be my guess.

It probably has something to do with advanced packaging, maybe also handling some of the power components and sensor components that Synaptics was getting from some of the IDMs.

Maybe On Semi can repurpose some of their fab equipment and fab capacity to handle that. We'll have to see. I'm sure there will be some updates on that.

The deal is expected to be finalized by the middle of 2027, so roughly nine months from now the deal should be complete. And ultimately what we're doing is we're leaving our position in On Semiconductor alone.

We're just gonna see how this pans out. Again, I do expect the stock price will probably be volatile and range bound for some time as the market digests what's going to happen with these two companies and more of the integrated strategy once both are mashed together, and we'll go from there.

If you're here for On Semi, maybe you would want to know a little bit more about Synaptics as well, since that is on course to be part of On Semi by middle of 2027. Check it out.