Bank of America says this chip stock is the best way to play the electric vehicle transition

Published Fri, May 12 202311:08 AM EDT

Investors may want to consider putting their money in this chip stock poised to capitalize on the global transition to electric vehicles, according to Bank of America. Analyst Vivek Arya reiterated his buy rating on On Semiconductor in a Friday note to clients, saying he sees strong tailwinds ahead as electrified cars demand more chips to operate. ON YTD mountain Shares in 2023 "We see ON as a top-3 global/top US vendor of smart power and sensing chips for EVs, charging/storage infra, autonomous vehicles and factory automation," he wrote. Demand for electric vehicles should eventually translate into 8% to 10% compounded annual revenue growth and mid-teen earnings per share growth. On Semiconductor shares have surged more than 29% in 2023, as investors roll back into the technology trade and semiconductor stocks and falling bond yield alleviate some pressure on the sector. Bank of America's $100 price target implies nearly 23% upside from Thursday's close. Among his reasons for liking the stock, Arya cited a strong balance sheet, growing free cash flow margins and solid management team, adding that the stock trades at a compelling valuation. Key to On Semiconductor's growth is also the lucrative silicon carbide industry. The chemical is commonly used to make more efficient, longer-lasting chips for electric vehicles. The company continues gaining share in this industry, with Bank of America projecting it could capture 30% to 35% long term. To be sure, the company does face some obstacles, including a backdrop of sluggish macro that could hinder auto demand and a potential inventory correction. One of its largest customers, Tesla , recently said it plans to reduce silicon carbide use. Even so, Arya views a solid path forward for the company with one of the "best growth prospects" across auto and industrials, he wrote. "We believe ON will utilize multiple levers (fab sales, 300mm manufacturing) and improve product mix to significantly enhance its margin profile, driving material EPS and free cash flow upside," Arya said. — CNBC's Michael Bloom contributed reporting