Edge AI And Auto Microcontrollers Will Modernize Production

Key Takeaways

• Expanding Edge AI and automotive microcontroller segments are set to drive future revenue growth, aided by new product launches and increased project momentum.
  
• Strategic investments in gallium-nitride and silicon carbide, along with manufacturing enhancements, aim to uplift productivity, revenue, and brand reputation.
  
• Decreased revenues, high inventories, and trade uncertainties pose risks to STMicroelectronics' profitability, supply chains, and market growth.

Catalysts

Designs, develops, manufactures, and sells semiconductor products in Europe, the Middle East, Africa, the Americas, and the Asia Pacific.

• STMicroelectronics is seeing strong growth in Edge AI projects developed on their tools, with a significant increase in the number of projects over the past 12 months. This growing trend in Edge AI is expected to bolster future revenues in the microcontroller market segment.
  
• The company is experiencing strong design momentum with its automotive microcontroller portfolio, which includes new product launches in 2025 and 2026, anticipated to drive future revenue growth in the automotive sector.
  
• The development and manufacturing agreement for gallium-nitride technology with InnoScience, as well as the company's focus on expanding silicon carbide capacity, are expected to complement its existing offerings and impact future revenue and gross margins positively.
  
• STMicroelectronics is executing a comprehensive program to reshape its manufacturing footprint, which includes the transition to more efficient 200-millimeter and 300-millimeter wafer fabs; this initiative is projected to improve productivity, efficiency, and operating margins by exiting 2027.
  
• The company's sustainability and carbon neutrality commitments, including sourcing 100% renewable electricity by 2027, are expected to enhance its brand reputation and operational efficiencies, possibly resulting in improved net margins in the long term.

STMicroelectronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming STMicroelectronics's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 14.0% in 3 years time.
• Analysts expect earnings to reach $2.1 billion (and earnings per share of $2.3) by about May 2028, up from $1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.7 billion in earnings, and the most bearish expecting $1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2028 earnings, down from 18.3x today. This future PE is lower than the current PE for the GB Semiconductor industry at 15.8x.
• Analysts expect the number of shares outstanding to decline by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.11%, as per the Simply Wall St company report.

STMicroelectronics Future Earnings Per Share Growth

Risks

• Decreased Q1 revenues and margins, alongside significant year-over-year declines in net income, suggest possible challenges in maintaining profitability, which could impact future earnings.
  
• The ongoing trade and tariff uncertainties present risks to car production levels, specifically impacting electric vehicle volumes, which could threaten automotive segment revenues.
  
• High inventory levels and potential issues in clearing excess inventory could strain gross margins and limit financial flexibility.
  
• Potential impacts from global tariffs and trade tensions could disrupt supply chains or customer relationships, posing risks to revenues and net margins.
  
• Competitive pressures, such as the 30% share agreement in silicon carbide, could limit STMicroelectronics' market capture, affecting revenue growth in key segments.

Valuation

• The analysts have a consensus price target of €23.614 for STMicroelectronics based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €32.13, and the most bearish reporting a price target of just €15.9.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $15.0 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of €19.82, the analyst price target of €23.61 is 16.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.