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Investing.com -- Morgan Stanley resumed coverage of ON Semiconductor (NASDAQ:ON) with an Equal Weight rating and a $39 price target, stating in a note Monday that while its estimates are below consensus, much of the downside appears priced in.

“Our FY26 revenue&EPS estimates are both 5% below street,” Morgan Stanley (NYSE:MS) wrote, forecasting $6.2 billion in revenue and $3.00 in earnings per share. 

Despite this cautious outlook, the firm noted, “with the stock trading at 13x we think the negativity is somewhat priced in.”

The firm outlined its stance through three key debates. On gross margins, analysts took a more conservative view than peers, expecting a 230 basis-point improvement year-over-year in 2026, compared with the Street’s estimate of 350 basis points. 

Although utilization is expected to improve by 900 basis points, Morgan Stanley warned that gains will be “offset by pricing headwinds and the drop off of capacity reservation fees.”

Regarding ON’s growth trajectory, the firm expects it to outpace the automotive semiconductor market slightly in 2026 — 7.5% growth versus 6% — but mainly “due to a lower base rather than anything structural.” 

Analysts pointed to limited near-term catalysts, with skepticism around the company’s silicon carbide (SiC) strategy and citing “intense competition” in image sensors.

On capital allocation, Morgan Stanley projected $1.3 billion and $1.4 billion in share buybacks for 2025 and 2026, respectively, but left open the possibility of acquisitions. 

“We also wouldn’t be surprised if the company decided to pursue another inorganic opportunity given the lack of near-term growth drivers.”

The firm concluded that for ON Semiconductor to trade above 15 times earnings again, it would need to demonstrate “clear signs of gross margin improvement,” something it doesn’t expect before the first half of 2026.

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