ON Semiconductor Corporation (ON) in Phoenix, Ariz., manufactures and sells semiconductor components for various electronic devices worldwide. The company operates in three segments: Power Solutions Group; Advanced Solutions Group; and Intelligent Sensing Group. In comparison, San Jose, Calif.-based Xilinx, Inc. (XLNX) designs, develops, and markets programmable devices and associated technologies worldwide. The company offers integrated circuits in the form of programmable logic devices.

The global semiconductor shortage has impacted several industries worldwide. The chip shortage has also caused chip prices to soar, benefiting the semiconductor industry. While huge investments are helping semiconductor manufacturers increase production, the supply shortage may not end soon. Furthermore, with growing demand for electric vehicles (EVs), and rising demand for advanced technologies in the hybrid working environment, the industry is expected to see increasing demand. According to a Fortune Business Insights report, the global semiconductor market is projected to grow at an 8.6% CAGR between 2021 - 2028. As a result, both ON and XLNX should benefit.

ON has gained 65.6% in price over the past six months, while XLNX has returned 63.1%. Also, ON’s 91.2% gains year-to-date are significantly higher than XLNX’s 47.8% returns. Moreover, ON is the clear winner with 104.1% gains versus XLNX’s 45.7% returns in terms of the past year’s performance.

Click here to checkout our Semiconductor Industry Report for 2021

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On October 19, 2021, ON announced that it had acquired GT Advanced Technologies, a producer of silicon carbide. This acquisition enhances the company’s ability to secure and grow the supply of SiC. Hassane El-Khoury, President and CEO of ON, said, "We are thrilled to have completed this acquisition, which enables us to boost SiC supply as we carry out our mission of building a sustainable future."

At the SC21 supercomputing conference on Nov.15, 2021, XLNX introduced the Alveo U55C data center accelerator card and a new standards-based, API-driven clustering solution for deploying FPGAs at a massive scale. The Alveo U55C accelerator brings superior performance-per-watt to high-performance computing and database workloads and easily scales through the Xilinx HPC clustering solution. This product introduction could see increasing demand in the coming months.

Recent Financial Results

ON’s revenues increased 32% year-over-year to $1.74 billion for the fiscal third quarter, ended October 1, 2021. The company’s non-GAAP operating income grew 30.8% year-over-year to $427.10 million, while its non-GAAP net income came in at $380.30 million representing 37.9% year-over-year increase. Also, its non-GAAP EPS was  $0.87, up 38.1% year-over-year.

XLNX’s revenues increased 22% year-over-year to $936 million for its  fiscal second quarter, ended October 2, 2021. The company’s non-GAAP operating income grew 33% year-over-year to $288 million, while its non-GAAP net income came in at $266 million, representing a 31% year-over-year increase. And its non-GAAP EPS was $1.06, up 29% year-over-year.

Past and Expected Financial Performance

ON’s EBITDA and total assets have grown at  CAGRs of 8.2% and 6.5%, respectively, over the past three years. Analysts expect ON’s revenue to increase 19.9% for the quarter ending March 31, 2022, and 27.1% in its fiscal 2021. The company’s EPS is expected to grow 165.7% for the quarter ending December 31, 2021, and 228.2% in fiscal 2021. Furthermore,  its EPS is expected to grow at 55.5% per annum over the next five years.

In comparison, XLNX’s EBITDA and total assets have grown at  CAGRs of 3.7% and 5.2%, respectively, over the past three years. The company’s revenue is expected to increase 14.1% for the quarter ending March 31, 2021, and 18.5% in fiscal 2021. Its EPS is expected to grow 37.7% for the quarter ending December 31, 2021, and 40.1% in fiscal 2021. Also, XLNX’s EPS is expected to grow at 18.8% per annum over the next five years.

Profitability

ON’s trailing-12-month revenue is 1.83 times XLNX’s. However, XLNX is more profitable, with gross profit and net income margins of 68.31% and 23.06%, respectively, compared to ON’s 37.53% and 10.61%.

Furthermore, XLNX’s 27.35%, 8.99%, and 11.03% respective ROE, ROA, and ROTC are higher than ON’s 17.77%, 7.19%, and 8.60%.

Valuation

In terms of forward non-GAAP P/E, XLNX is currently trading at 52.52x, which is 132.6% higher than ON’s 22.58x. And XLNX’s forward EV/S ratio of 14.01x is 212% higher than ON’s 4.49x.

So, ON is relatively affordable here.

POWR Ratings

ON has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In comparison , XLNX has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

ON has an A grade for Growth, which is consistent with analysts’ expectations that its EPS and revenue will increase significantly in the coming months. In contrast,  XLNX has a C grade for Growth, which is in sync with analysts’ expectations that its EPS and revenue will grow moderately in the near term.

Also, ON has a B grade for Value, consistent with its forward non-GAAP PEG of 0.47x, which is 70.7% lower than the 1.60x industry average. However, XLNX has a C grade for Value, which is in sync with its forward non-GAAP PEG of 3.64x, which is 127% higher than the 1.60x industry average.

Of the 100 stocks in the A-rated Semiconductor & Wireless Chip industry, ON is ranked #37. In comparison, XLNX is ranked #60.

Beyond what I have stated above, we have also rated the stocks for Quality, Momentum, Stability, and Sentiment. Click here to view all the ON ratings. Also, get all the XLNX ratings here.

The Winner

The semiconductor industry is growing rapidly because of the rising demand for chips, primarily from the automotive and consumer electronics sectors. While both ON and XLNX are expected to gain, we think it is better to bet on ON now because of its lower valuation and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Semiconductor & Wireless Chip industry here.

Click here to checkout our Semiconductor Industry Report for 2021

XLNX shares fell $0.81 (-0.39%) in premarket trading Wednesday. Year-to-date, XLNX has gained 48.16%, versus a 25.19% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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