Big oil companies like Hess (NYSE: HES) and the classics such as Chevron (NYSE: CVX) and even Exxon Mobil (NYSE: XOM) are raking in big profits lately. It goes to show just how excited the market has become over other areas of the economy, like semiconductor and technology stocks, which is where all the growth came to focus for the future pricing of stocks.

Now that the newest earnings season has kicked off, investors are all the more focused on the biggest names in the industry, names like NVIDIA (NASDAQ: NVDA) and Intel (NASDAQ: INTC). However, the smaller names typically end up surprising investors with unexpected earnings figures, sending their stock prices on a wild ride of percentage points.

This is why looking across the semiconductor industry’s value chain can come in handy. Names like Onsemi (NASDAQ: ON) really begin to shine in the way analysts perceive its upside potential, which just so happens to be trading at a significant discount to the rest of its peer group. You should read this if your portfolio is tired of missing out on past semiconductor gains.

All the good stuff

As the automotive industry starts adopting more and more technology into its vehicles, there is a growing need for chips to adapt to the increasing demands of the space. ON comes up with a suite of solutions to make this happen. But don’t take the story at face value; a savvy investor like yourself must see facts.

This stock had outperformed the broader VanEck Semiconductor ETF (NASDAQ: SMH) by as much as 40.0% up to 2021, after which date the car industry began experiencing tightening shortages of inventory and delayed orders, causing the order book and demand for ON to fall suddenly.

Over the past twelve months, the industry has felt some recovery and moved on to deliver a stellar 50.8% performance, leaving ON behind by a broad 64.5% underperformance gap. Now that the supply chain has normalized in the car market, demand seems to grow back after inventory levels normalized.

You can see this in action by analyzing the latest ISM manufacturing PMI index reports, where the metal industry executives point to a January month that has been “running high” as automotive orders trickle in after inventory reductions. As vehicle demand returns to the U.S. economy, onsemi will likely see a comeback in its stock price.

Apart from one of the most widely followed reports in the economy pointing to a breakout of Onsemi’s very customers, the most prominent names on Wall Street are pushing their own set of tailwinds, pushing the thesis even further. Analysts at The Goldman Sachs Group (NYSE: GS) expressed their view on the manufacturing sector in their 2024 macro outlook report.

Pointing to a breakout in manufacturing, Goldman is indirectly including car production, which in turn poses a potential upside in onsemi’s future earnings, but more on that later.

The record is set

Knowing what you know now, it shouldn’t be all that surprising to see analysts placing a $98.1 price target on the stock, calling for a 38.5% upside from today’s prices. Despite the bullishness coming from the analyst side, markets have yet to realize the potential in the name, as the price trades at only 64.0% of its 52-week highs.

Compared to other names in the space, companies like Microchip Technology (NASDAQ: MCHP) and Analog Devices (NASDAQ: ADI), which trade at much more expensive levels, onsemi starts to look like every value investor’s dream.

From 2019 to the present, the company has grown its free cash flow (operating cash flow minus capital expenditures) by ten times, which should have sent the stock to all-time highs. Building on the financial momentum comes a consistent double-digit revenue growth, as seen in their latest quarterly financial results, a trend that is not showing any signs of slowing down.

For better or for worse, this stock can be bought at a discount today, and the tape has been set to give ON stock a clear path forward. In any case, the automotive industry may be preparing for the potential FED rate cuts, as they understand the positive effect this will have on car sales and, subsequently, semiconductor demand.

Analog and Microchip trade at 95.0% and 89.0% of their 52-week high prices, respectively, meaning that any potential growth these businesses can see in the coming months is likely priced into the stock today. This potential deal is for those who are patient enough to see the whole wave develop through, and patience favors the savvy investor.