AI power adds a recovery engine
- ON is built around power and sensing chips, with automotive and industrial still the core markets.
- Q1 2026 revenue rose 5% year over year to $1,513.3 million, the first clear sign that the downturn is easing.
- Management now expects AI data center revenue to double year over year in 2026, from about $250 million in 2025.
- Gross margin improved for the third straight quarter to 38.5% on a non-GAAP basis, and management expects more gains through 2026.
- The main risk is that autos and factories stay weak while ON is still cutting costs and reshaping its manufacturing base.
Recovery plus AI power
ON is coming out of a hard chip downturn. Revenue fell 15.3% in 2025, and gross margin dropped to 33.1%. Q1 2026 looked better: revenue rose 5% year over year to $1,513.3 million, led by the Power Solutions Group.
The new piece is AI data centers. ON sells power parts that help move electricity from the wall to the chips inside AI servers. Management said AI data center revenue grew more than 30% quarter over quarter in Q1 2026 and now expects that revenue to double year over year in 2026. In Q&A, management tied that to about $250 million of AI revenue in 2025, which implies a target near $500 million for 2026.
The bull case is simple: autos and industrial recover, AI power becomes a real growth line, and higher factory use lifts margins. Management said non-GAAP gross margin reached 38.5% in Q1 2026 and should expand sequentially through the year.
The bear case is still real. Automotive was guided flat sequentially for Q2, and ON still depends on cyclical car and factory spending. If customer orders stay just-in-time, or if the manufacturing realignment misses its cost goals, the AI story may not be enough to lift the whole company quickly.
Chips for power-hungry systems
ON designs and makes chips that control power, sense images, and improve energy use. It sells into cars, industrial equipment, solar systems, fast chargers, and now AI data centers. The company earns money when customers build more electric vehicles, add driver-assistance features, automate factories, or add power-heavy servers.
Power chips are the center of the model. They help convert, move, and manage electricity. That matters in EVs, charging stations, solar inverters, and AI servers, where wasted power becomes heat and cost.
The weak point is fixed cost. Chip factories are expensive, so margins fall when demand drops and plants run below normal levels. ON is using its manufacturing realignment program to cut jobs, write down some assets, and match capacity with long-term demand.
The strategy can work if ON keeps winning higher-value designs while trimming weaker revenue. It can break if auto and industrial customers delay orders, if AI power competition gets tougher, or if factory changes disrupt supply.
Power first, sensing second
Automotive power chips
These chips manage power in vehicles, including electric vehicles and charging systems. This is tied to EV adoption, but it is also exposed to car production cycles.
Industrial and energy power
ON sells power parts for factory automation, solar, and industrial equipment. Demand can be lumpy because customers often cut orders when the economy slows.
AI data center power
ON provides power management parts for AI servers and says adoption is broadening across multiple XPU vendors and leading hyperscalers. Management expects this revenue to double year over year in 2026.
Silicon carbide and SiC JFETs
Silicon carbide helps systems run at higher power and efficiency. ON is seeing traction with SiC JFETs in AI server power supply units.
Vertical GaN platform
ON is developing vertical gallium nitride, or vGaN, for high-voltage and high-efficiency uses. The main targets are AI power and automotive systems.
Image and depth sensors
These sensors help cars and machines see their surroundings. The industrial image sensor design win funnel is up 55% year over year, but the segment is smaller than power.
Q1 mix shows power leading
Segment shares are based on Q1 2026 revenue of $1,513.3 million. Power Solutions Group was the largest segment and grew fastest, while Advanced Solutions Group was still down year over year.
What could go wrong
Auto and industrial orders stall
High impact · Medium oddsON still depends on automotive and industrial customers. Q1 2026 showed total revenue growth, but the recovery is uneven and automotive was guided flat sequentially for Q2. If customers keep ordering only what they need now, the restocking cycle could be delayed.
AI power share misses the target
High impact · Medium oddsManagement now expects AI data center revenue to double year over year in 2026. That raises the bar. The 2025 Form 10-K warns that ON's AI power technologies may not capture market share as expected.
Margin gains do not arrive
High impact · Medium oddsON is counting on higher factory use, better product mix, and cost cuts to lift gross margin. Non-GAAP gross margin was 38.5% in Q1 2026, but the long-term goal is much higher. If factories stay underused or restructuring savings lag, earnings power could disappoint.
China and trade disruption
Medium impact · Medium oddsON has assembly and test operations in Leshan, China. The 2025 Form 10-K says actions by U.S. or Chinese governments could impact the market for ON's products and revenue. New restrictions could raise costs or slow shipments.
Competition in high-value power chips
Medium impact · High oddsAI power is attractive, so major semiconductor rivals will fight for share. Management says the wall-to-core AI power market has only two major competitors, which sounds good for share but also means competition is concentrated and intense. ON must keep spending on research and development to stay relevant.
In one breath
What does ON Semiconductor make?
ON makes power and sensing chips. Its products help electric vehicles, chargers, factories, solar systems, and AI servers manage electricity and sense the world around them.
Why does AI matter for ON Semiconductor?
AI servers use a lot of power, and that power has to be converted and controlled efficiently. ON sells power solutions for that job, and management expects AI data center revenue to double year over year in 2026.
Is ON Semiconductor mainly an auto chip company?
Automotive is still a major market, but ON also sells into industrial, energy, and AI data center markets. The current thesis depends on both a cyclical recovery in autos and industrial and faster growth in AI power.
What should investors watch next?
The key signals are AI revenue growth, sequential gross margin gains, and a return to year-over-year growth in automotive. Those would show that both the recovery story and the AI power story are working.