Is There Now an Opportunity in STMicroelectronics After Latest Automotive Chip Demand Surge?

If you have been eyeing STMicroelectronics lately, chances are you are weighing whether its recent momentum signals a real turnaround or something less durable. The stock closed last at $24.81, capping off a stretch that saw it climb 4.2% in the past week and 13.8% over the past 30 days. That is a stark contrast to the longer view, where its one-year return is down 2.3%, and over the past three years, it has slid 24.3%. Even looking five years back, the stock is still down 11.9%. Moves like these speak to shifting investor risk perceptions, and a few major market developments such as evolving demand for automotive semiconductors and fresh interest in European tech seem to have given shares a spark despite the less inspiring long-term trend.

But let’s get to what matters for anyone considering a buy, sell, or hold: STMicroelectronics currently sports a valuation score of 3, with that number rising by one for each undervalued metric out of six key checks. It is clear the company appears undervalued in several respects, but not across the board. In the next section, I will walk you through how these valuation signals stack up across different approaches before we dig even deeper into what really makes a valuation compelling in today’s market.

STMicroelectronics delivered -2.3% returns over the last year. See how this stacks up to the rest of the Semiconductor industry.

Approach 1: STMicroelectronics Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model is a widely used approach for estimating a company's intrinsic value by projecting its future cash flows and discounting them back to today's dollars. This method attempts to answer what the business is worth based on the money it can generate in the future, adjusted for the time value of money.

For STMicroelectronics, the model used is a 2 Stage Free Cash Flow to Equity version. Currently, the company's last twelve months (LTM) Free Cash Flow stands at a negative $654.7 Million, reflecting some recent pressure on its ability to generate cash. Despite this, projections from analysts suggest a turnaround, with Free Cash Flow expected to rise to $1.66 Billion in 2027. Simply Wall St further extrapolates these trends and estimates Free Cash Flows approaching $3.08 Billion by 2035.

The DCF model arrives at an intrinsic fair value of $32.95 per share for STMicroelectronics. Compared to the current share price of $24.81, this suggests the stock is trading at a substantial 24.7% discount.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for STMicroelectronics.

Our Discounted Cash Flow (DCF) analysis suggests STMicroelectronics is undervalued by 24.7%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: STMicroelectronics Price vs Earnings

The Price-to-Earnings (PE) ratio is a go-to valuation metric for profitable companies like STMicroelectronics because it allows investors to gauge what the market is willing to pay today for a dollar of future earnings. When companies are consistently profitable, the PE ratio provides a clear snapshot of how expectations for growth and risk factor into their stock price.

A company's PE ratio tends to be higher if investors believe earnings will grow rapidly in the future, or if the business is considered less risky. Conversely, slower growth prospects or higher perceived risks typically result in a lower PE ratio being considered fair or normal for the stock.

STMicroelectronics currently trades at a PE ratio of 39.90x. To put this in context, this is above the industry average of 37.83x and surpasses its peer group average of 28.42x. However, looking at the Simply Wall St Fair Ratio, a proprietary measure that incorporates STMicroelectronics' specific earnings growth, profit margins, risk profile, industry, and company size, the fair PE ratio for the company is calculated at 41.32x.

The Fair Ratio offers a fuller picture than industry or peer comparisons because it assesses what would truly be an appropriate valuation given STMicroelectronics' unique strengths and weaknesses, rather than lumping it together with the entire sector.

Comparing the current PE ratio of 39.90x to the Fair Ratio of 41.32x, the stock appears to be valued ABOUT RIGHT based on the balance of growth, market positioning, and risk.

Result: ABOUT RIGHT

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your STMicroelectronics Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let’s introduce you to Narratives. A Narrative is your personal story about a company’s future. It is where you connect the company’s real-world direction and catalysts to specific financial forecasts, such as future revenue, earnings, and profit margins, and then translate those expectations into a fair value per share.

With Narratives, you are not just seeing the numbers; you are building reasoning behind them. It is an easy, accessible tool available to all investors on Simply Wall St’s Community page, allowing millions to share their perspectives and see how new information, like news events or earnings releases, instantly adjusts fair value estimates. Narratives help you decide when to buy, sell, or hold by clearly comparing the fair value from your story to today’s share price. This approach helps you invest with conviction.

For example, one STMicroelectronics Narrative might foresee steady revenue growth driven by AI and electric vehicles with a fair value of $34.65 per share. Another, more cautious view, might see heightened risks from competition and industry volatility, arriving at a fair value closer to $26.17 per share.

Do you think there's more to the story for STMicroelectronics? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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