STMPA: Normalizing Chip Inventories Will Support Multi Year Margin Recovery

We trim our fair value estimate for STMicroelectronics slightly to approximately $24.62 from about $24.72 per share as analysts lower price targets amid concern over a slower revenue recovery trajectory and near term gross margin pressure, even as longer term fundamentals are viewed as gradually improving.

Analyst Commentary

Recent Street commentary on STMicroelectronics reflects a mixed but generally constructive stance, with most analysts trimming price targets to reflect slower near term revenue growth and gross margin compression while acknowledging a healthier medium term setup.

Price targets have been reset lower across both U.S. dollar and euro based coverage, with ranges now clustering in the low to mid EUR 20s and mid USD 20s to low USD 30s. This implies more modest upside and a tighter risk or reward profile relative to prior expectations.

Bullish Takeaways

• Bullish analysts argue that recent target cuts largely reflect a reset of expectations, not a structural change in STM's competitive position. They see the current valuation as better aligned with achievable earnings through 2026.
• Some view lower gross margins in the near term as creating easier comparisons into 2026. This may potentially enable STM to deliver visible margin expansion and earnings growth once demand normalizes.
• Improving fundamentals, including normalizing semiconductor inventories and potential content gains in upcoming smartphone cycles, are seen as underappreciated drivers of a multi year recovery in revenue and free cash flow.
• Upgrades to Outperform ratings and higher price targets from prior conservative levels suggest a belief that recent share price weakness has overdiscounted cyclical risks and created a more attractive entry point.

Bearish Takeaways

• Bearish analysts highlight that STM's gross margin trajectory into 2026 could remain pressured, limiting operating leverage and constraining upside to earnings versus prior cycles.
• There is concern that the revenue recovery is more muted than earlier hoped, particularly in analog and industrial pockets. This could delay a sustained re rating of the shares.
• More cautious views emphasize that, despite long term opportunities in automotive and industrial markets, execution risk around pricing, mix, and capacity utilization may cap near term valuation multiples.
• Neutral stances, including from major houses such as JPMorgan, point to a balanced risk or reward profile, with potential upside from cyclical recovery offset by uncertainty around the pace and durability of that rebound.

What's in the News

• Launched the ST25DA C secure NFC chip, the first commercial solution aligned with the latest Matter 1.5 smart home standard. It enables tap to pair onboarding and battery less commissioning for easier, more secure smart home installations, with mass production planned for 2026 (Key Developments).
• Introduced new GaNSPIN611 and GaNSPIN612 GaN based smart power ICs that extend high efficiency GaN technology from chargers into home appliance and industrial motor drives up to 400 Watts. These products are designed to reduce system size and cost while meeting stringent EMC and eco design norms (Key Developments).
• Expanded the STM32 AI Model Zoo and project support tools to accelerate embedded and edge AI development on STM32 MCUs across wearables, smart cameras, industrial automation, and smart city applications (Key Developments).
• Unveiled the high performance STM32V8 MCU family, built on 18nm PCM technology and Arm Cortex M85 cores up to 800 MHz, with early adoption by SpaceX for Starlink satellite laser communication systems and broader availability expected from 2026 (Key Developments).
• Revised 2025 outlook to midpoint revenues of about $11.75 billion, implying 22.4% second half over first half growth and signaling an expected market recovery, while continuing to return capital via buybacks totaling 1.51% of shares for $348 million under the current program (Key Developments).

Valuation Changes

• Fair Value Estimate edged down slightly to approximately $24.62 from about $24.72 per share, reflecting modestly softer assumptions around the near term recovery.
• Discount Rate decreased slightly to about 9.05% from roughly 9.14%, indicating a marginally lower perceived risk profile in the updated model.
• Revenue Growth was trimmed marginally to around 8.53% from about 8.56%, signaling only a minor softening in the medium term top line outlook.
• Net Profit Margin was nudged higher to approximately 12.81% from about 12.80%, suggesting a very small improvement in long run profitability expectations.
• Future P/E was effectively unchanged at about 16.9x versus a prior 16.86x, indicating a stable long term earnings multiple underpinning the valuation.