Advanced Manufacturing In Italy Will Improve Operating Efficiencies

Key Takeaways

• STMicroelectronics is capitalizing on silicon carbide technology and expanding in China’s electric vehicle market, enhancing future revenue prospects and design wins.
  
• Strategic moves, including manufacturing advancements and collaborations, are set to improve operating efficiencies, reduce costs, and bolster growth in IoT and AI sectors.
  
• Declines in revenues and various segments coupled with inventory challenges and price pressures could impact STMicroelectronics' financial stability and operating margins if trends persist.

Catalysts

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

• STMicroelectronics' focus on silicon carbide technology presents a significant growth opportunity, especially with their strong momentum in the rapidly expanding Chinese electric vehicle market. This is expected to increase future revenues as they have secured numerous design wins and engagements, particularly highlighted by their supply agreement with Geely Auto.
  
• The transition towards advanced manufacturing processes, including the new 200-millimeter silicon carbide manufacturing facility in Italy and 8-inch production capabilities, is anticipated to improve STMicroelectronics' operating efficiencies and reduce manufacturing costs. This should positively impact gross margins over the longer term.
  
• STMicroelectronics' strategic collaboration with Qualcomm Technologies aims to integrate advanced connectivity solutions with their MCU ecosystem, thereby strengthening their position in Industrial and consumer IoT markets. This alignment with key industry trends is likely to drive revenue growth through the introduction of innovative, integrated solutions.
  
• The reorganization of STMicroelectronics’ product groups and the introduction of a new company-wide program to reshape their manufacturing footprint are expected to result in significant cost savings, projected to be in the high triple-digit million dollar range annually exiting 2027. This should contribute to improved net margins and operating performance.
  
• Investments in advanced technologies such as the Neuromorphic Computing Unit (NPU) to enable Edge AI applications promise to enhance ST's competitive offering in burgeoning sectors like AI and machine learning. These solutions have the potential to drive incremental revenues and enhance earnings as industries adopt AI technologies.

STMicroelectronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming STMicroelectronics's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 15.3% in 3 years time.
• Analysts expect earnings to reach $2.3 billion (and earnings per share of $2.49) by about April 2028, up from $1.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.0 billion in earnings, and the most bearish expecting $1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, up from 11.8x today. This future PE is greater than the current PE for the GB Semiconductor industry at 12.3x.
• Analysts expect the number of shares outstanding to decline by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.27%, as per the Simply Wall St company report.

STMicroelectronics Future Earnings Per Share Growth

Risks

• The company experienced significant declines in net revenues across several segments and end markets, including a 23.2% overall revenue decrease in 2024, which could impact future earnings and financial stability if these trends persist.
  
• The automotive segment is experiencing a slowdown with a book-to-bill ratio below 1, pointing to potential ongoing challenges in revenue growth and inventory levels, particularly in key markets like Europe.
  
• The company faces inventory challenges and a delayed recovery in the industrial sector, with excess inventory in distribution channels potentially leading to underutilization, impacting gross margins.
  
• There is a risk of significant capacity underutilization charges exceeding 500 basis points, affecting cost structures and profit margins, with recovery also contingent on market demand rebounding.
  
• Price pressures are anticipated to result in mid-single digit price erosion, alongside declining capacity reservation fees, which might adversely affect revenue and operating margins in the upcoming quarters.

Valuation

• The analysts have a consensus price target of €23.518 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 €32.1, and the most bearish reporting a price target of just €15.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $15.1 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 8.3%.
• Given the current share price of €18.06, the analyst price target of €23.52 is 23.2% 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.