J.P. Morgan: ON Semiconductor’s AI and industrial businesses grew in the third quarter, while automotive supply allocation weighed on shipments

Where did third-quarter growth come from?

Third-quarter 2026 revenue was 1.722 billion dollars, up 11% year over year and 7% sequentially. It exceeded the midpoint of prior guidance and was broadly in line with market expectations of approximately 1.7 billion dollars.
AI data center revenue reached 180 million dollars, up 39% sequentially and 175% year over year. Industrial revenue reached 467 million dollars, up 10% sequentially and 9% year over year, supported by demand from power grids, energy infrastructure and factory automation.
The non-GAAP gross margin rose 1.9 percentage points sequentially to 41.2%, while the operating margin rose 2.4 percentage points to 23.2%. Adjusted earnings per share were 0.90 dollars, above market expectations of 0.88 dollars.

The automotive business accounted for approximately 45% of third-quarter revenue, with revenue of 777 million dollars, down 1% both year over year and sequentially. Management attributed the decline to the temporary diversion of supply to AI data center and industrial markets, saying end demand and market share had not weakened.
The company said it was still meeting automakers’ end demand but had delayed shipments intended for customers to replenish inventories. Distribution inventory fell from approximately 10.1 weeks in the second quarter to approximately 9.9 weeks in the third quarter, remaining within the company’s stated normal range of 9 to 11 weeks.
Management expects additional supply to bring automotive shipments back to normal in the first quarter of 2027 and expects the automotive business to return to its long-term annual compound growth target of approximately 9% in 2027.

The midpoint of the company’s fourth-quarter revenue guidance was 1.765 billion dollars, up approximately 2.5% sequentially and slightly above market expectations of 1.742 billion dollars. The midpoint of adjusted earnings per share guidance was 1.01 dollars, also above market expectations of 0.96 dollars.
The company expects industrial revenue to grow by a low-double-digit percentage sequentially and AI data center revenue to grow by a mid-teens percentage. Automotive revenue is expected to decline by a high-single-digit percentage sequentially due to continued supply allocation and the timing of customer deliveries.
The midpoint of non-GAAP gross margin guidance was 42.5%, a further increase of 1.3 percentage points from the third quarter. JPMorgan expects new products, improved capacity utilization and savings from “Fab Right” to support further margin expansion. Utilization is expected to remain at approximately 83% in the fourth quarter and improve in 2027.

The company announced the acquisition of Ferric for 600 million dollars, plus additional revenue-linked payments of up to approximately 175 million dollars. Ferric’s integrated voltage regulators will complement ON’s AI power-supply portfolio for next-generation AI processors.
Management expects AI data center revenue of approximately 620 million dollars in 2026, up 140% year over year, and expects it to double again in 2027. Following the Ferric acquisition, management raised its 2030 revenue target for the business from more than 2.5 billion dollars to more than 3 billion dollars.
Management expects the transaction to contribute to its growth and gross margin targets over time, but to have little near-term financial impact. The company’s long-term gross margin target of approximately 53% also depends on higher capacity utilization, cost savings, a new product mix and pricing.