ON Semiconductor Quadruples AI Data Center TAM to $50 Billion as Data Center Revenue Set to "More Than Double" in 2026
Q2 2026 earnings call, August 3, 2026
ON Semiconductor delivered a quarter that beat guidance across every line, but the more consequential news for investors came in the size of the market opportunity management now sees ahead of it. The company raised its 2030 addressable market for AI data center power from $12 billion to nearly $50 billion, a roughly fourfold increase, while simultaneously lifting its electric vehicle TAM from $26 billion to $63 billion. Combined with an upgraded outlook for AI data center revenue this year, the print signals that onsemi's multiyear repositioning around power semiconductors is now intersecting with two of the largest capital cycles in the industry: AI infrastructure buildout and vehicle electrification.
AI data center TAM explodes as content per rack marches toward $115,000
CEO Hassane El-Khoury attributed the TAM increase largely to a bottoms-up recalculation tied to projected gigawatt-scale power installations by 2030, converted into content-per-rack assumptions. Today's content per rack sits near $15,000, split roughly 30% high-voltage and 70% medium-to-low voltage. As the industry transitions toward 800-volt DC distribution architectures, that figure is expected to climb toward $115,000 per rack, with the mix flipping to roughly 50% high-voltage. "You're not going to see that as far as revenue as a step function because remember, you have a build-out that's going to happen," El-Khoury cautioned, describing the ramp as a "very aggressive longer-term growth" trajectory rather than an overnight inflection, with meaningful ramp beginning "end of '27, beginning of '28, give or take a quarter."
Analysts pressed on whether the growth was purely a silicon carbide story. It is not. El-Khoury emphasized the company's exposure runs "from the wall to the core," spanning silicon carbide MOSFETs, silicon carbide JFETs, and silicon-based products across the entire power tree, with growth "very equal across all of them." Silicon carbide revenue tied specifically to AI data center applications is expected to grow nearly 60% year-over-year in 2026, but management was clear that data center strength is broader than any single technology, including new design wins inside NVIDIA's MGX ecosystem, two power supply platform wins with China's Great Wall, and expanding content with AWS on power supply and battery backup systems.
Guidance upgraded: AI data center revenue now set to "more than double"
Management moved the goalposts on its 2026 AI data center outlook, upgrading language from simple doubling to "more than double," a shift multiple analysts probed for magnitude. Quinn Bolton of Needham asked directly whether the business was tracking meaningfully above the previously discussed $500 million reference point; El-Khoury declined to break out the specific dollar figure but pointed to the change in language itself as evidence of accelerating momentum. Within the "other" revenue category, which houses AI data center exposure, sequential growth of 34% in the quarter to $400 million was primarily, though not entirely, attributable to data center demand, according to CFO Thad Trent. Guidance for the third quarter implies that "other" revenue grows in the high teens percentage sequentially.
Gross margin inflection is underway, with utilization the primary lever
Q2 non-GAAP gross margin came in at 39.3%, up 80 basis points sequentially, even as utilization jumped from 77% to 83%. Trent explained that utilization changes take roughly two quarters to flow through the P&L, meaning the Q2 margin print actually reflected Q4 2025 utilization levels, which had declined 6 percentage points. The favorable mix onsemi saw in AI data center offset that lag. Looking forward, Trent reiterated the standard sensitivity of 25 to 30 basis points of gross margin improvement for every point of utilization increase, which implies continued sequential expansion into year-end. Guidance for Q3 gross margin jumped to a range of 40% to 42%, a step-up Trent called "significant" as utilization gains finally hit the income statement.
Supply tightens, lead times stretch, and pricing power returns
Perhaps the clearest evidence of a genuine cyclical recovery came from the supply side commentary. Lead times extended from roughly 27 weeks to 32 weeks across the portfolio, with rising order volume inside lead time and increased customer escalations, both classic signs of tightening supply. Management confirmed it prioritized AI data center shipments over automotive and industrial allocations during the quarter to capture the fastest-growing opportunity, a decision El-Khoury said produced no material customer impact but will require catch-up through the third and fourth quarters. The company is also implementing a second round of price increases to offset rising input costs in raw materials and external manufacturing, with benefits expected to phase in over the next several quarters. El-Khoury was blunt about the cost outlook heading into 2027: "The only consistent message I can say here is it's not going down... I'm not expecting a softer pricing environment in '27 either."
China EV share gains keep accelerating
onsemi's automotive business in China grew 13% in the first half of 2026 even as overall vehicle sales in the market fell 4%, evidence of continued content and share gains with customers including Geely, Zeekr, and Xiaomi. The company now expects Chinese silicon carbide revenue to grow between 60% and 70% year-over-year, up from prior expectations, driven by share gains and new platform ramps. In the U.S., the company highlighted a win on Rivian's R2 platform spanning both MOSFETs for zonal power distribution and silicon carbide for onboard charging, underscoring its ability to capture content across multiple vehicle domains rather than a single component category. The EV TAM increase to $63 billion also reflects a broadened view of hybrid vehicle opportunity, where onsemi's silicon and IGBT technology is capturing extended-range hybrid programs that management had previously modeled more conservatively.
Synaptics deal and capital returns round out the story
The company reiterated its agreement to acquire Synaptics, expected to close in mid-2027, framing the deal as complementary to its power, sensing, and control portfolio at accretive gross margins, with synergies expected from onsemi's manufacturing scale and sales channel. Separately, the company confirmed it has substantially completed its planned exit of roughly $900 million in non-core revenue over recent years, with the final $35 million exited in the second quarter and no further exits expected. Divestitures of the Mountain Top and Philippines manufacturing facilities are projected to deliver $35 million in annualized savings starting in 2027, representing about 50 basis points of the company's targeted 200 basis points of gross margin improvement under its Fab Right initiative. On capital returns, the company generated $425 million of free cash flow in the quarter, a record 24% free cash flow margin on a trailing-twelve-month basis, and returned $332 million to shareholders through buybacks, bringing year-to-date capital returns to roughly 105% of free cash flow.
Guidance for the third quarter
onsemi guided third-quarter revenue to a range of $1.65 billion to $1.75 billion, with non-GAAP gross margin between 40% and 42% and non-GAAP earnings per share between $0.81 and $0.93, implying earnings growth roughly three times faster than revenue at the midpoint. By segment, management expects automotive revenue up low single digits sequentially, industrial roughly flat, and the AI data center-driven "other" category up in the high teens percentage. The company will host an Analyst Day in New York on September 16, where it is expected to provide additional detail on the newly expanded TAM figures and multiyear margin targets.