Bank of America has adjusted its stance on two major analog chip suppliers, elevating ON Semiconductor to a Buy and reducing NXP Semiconductors to a Neutral rating, according to the firm's first-quarter analog semiconductor preview.
The decisions rest on what BofA describes as a widening split between companies positioned to capture AI-related growth and those with more limited exposure, coupled with differing free cash flow profiles and margin expansion potential.
Analyst Vivek Arya lifted his price target for ON Semiconductor to $85 from $70, signaling increased conviction in the company's medium-term outlook. At the same time, Arya lowered his target for NXP Semiconductors to $230 from $245, reflecting less optimism about that firm's earnings trajectory.
In explaining the upgrade for ON, Arya acknowledged that the move could be "potentially a tad early" given weak auto and electric vehicle demand. Still, he pointed to several factors supporting a more positive view: an improving product pipeline, a free cash flow yield of roughly 6%, a $6 billion share repurchase commitment scheduled over three years, and potential expansion of EBIT margins toward approximately 30% by 2028. The analyst also noted ON's relative share-price underperformance - a 36% decline over the past three years versus peers' 7% rise and the SOX index's 132% gain - framing ON as a possible catch-up candidate due to auto- and EV-related weakness.
For NXP, BofA flagged more constrained earnings leverage, modeling only 300 to 400 basis points of margin expansion through 2028. The firm highlighted NXP's lack of AI-focused products and its greater dependence on consumer phones and IoT markets as weight against the stock. BofA also called attention to NXP's planned exit from certain high-margin communications infrastructure and radio frequency businesses, viewing that shift as a headwind to future profitability.
The bank emphasized a preference for companies that can deliver robust free cash flow and participate in AI-driven growth, particularly in a mixed demand environment where strength in data center and aerospace sectors is contrasted by weakness in traditional automotive and consumer markets.
Among large-cap analog names, BofA continues to favor Analog Devices as its top pick. In the small- and mid-cap arena, the bank prefers MACOM Technology Solutions.
Context limitations: The firm framed these views within its first-quarter analog semiconductor preview; details beyond the items stated above were not provided in the summary of BofA's note.