STM - Morgan Stanley downgrades STMicroelectronics after weak Q2 results: Should you Sell or Hold?
2024-07-26 09:20:38 ET
STMicroelectronics NV (NYSE: STM) experienced a significant drop in its stock price yesterday, falling over 15% after reporting mixed Q2 earnings and slashing its 2024 revenue outlook again.
The company reported Q2 GAAP EPS of $0.38, beating expectations by $0.03, but its revenue of $3.23 billion missed estimates by $40 million, representing a 25.4% year-over-year decline.
Net cash from operating activities decreased to $702 million, down from $1.31 billion in the same quarter last year.
The company’s net capex was $528 million, and free cash flow was $159 million, both down from the previous year.
Inventory levels increased slightly to $2.81 billion, with days sales of inventory rising to 130 days from 126 days a year ago.
The company’s adjusted net financial position stood at $2.80 billion as of June 29, 2024.
For Q3, STMicroelectronics expects net revenues of $3.25 billion and a gross margin of 38%, which is below market expectations of $3.55 billion.
The full-year revenue forecast has been cut to a range of $13.2 billion to $13.7 billion, down from previous estimates of $14 billion to $15 billion.
Analysts’ views
Morgan Stanley responded to the weak earnings and revised its outlook by downgrading STMicroelectronics from Overweight to Equal-Weight and cutting the price target to $35 from $48.
Analyst Lee Simpson noted widespread weakness in key areas, particularly in automotive and industrial segments, which led to the reduced guidance.
The downgrade reflects concerns over the company’s limited visibility and ongoing weakness in Q3, including gross margin impacts from deeper under-utilization charges and product mix effects.
Other analysts have varied views on STMicroelectronics. Goldman Sachs recently upgraded the stock to Neutral from Sell, citing improving demand in multiple end markets and setting a price target of $45.80.
Goldman Sachs analysts highlighted potential recovery in consumer end markets and long-term benefits from EV adoption despite near-term challenges.
The semiconductor market remains volatile, and while some analysts see potential for recovery, others remain cautious given the current downturn.
Recent developments at STMicroelectronics
On the development front, STMicroelectronics received EU regulatory approval for €2 billion in Italian state aid to establish a new semiconductor manufacturing facility in Sicily.
This facility is part of a larger €5 billion investment to produce Silicon Carbide power devices, aiming to strengthen Europe’s semiconductor supply chain and reduce reliance on imports.
The facility is expected to be fully operational by 2032, contributing significantly to the company’s long-term growth prospects.
Despite the challenges, STMicroelectronics continues to invest in growth and shareholder returns.
The company completed a $1.04 billion share repurchase program and announced a new $1.1 billion buyback plan over three years.
These actions reflect management’s confidence in the company’s future despite the current headwinds.
STMicroelectronics’ net financial position remains strong, with total liquidity of $6.29 billion and total financial debt of $3.09 billion as of June 29, 2024.
Fundamentals and valuation
Fundamentally, STMicroelectronics is navigating a difficult market environment. The company’s revenue from key segments, including Analog, Power & Discrete, and Microcontrollers, has declined significantly year-over-year.
Operating income fell by 67.3% to $375 million, and the operating margin decreased to 11.6% from 26.5% in the prior year.
These declines were driven by reduced demand in the automotive and industrial sectors and higher unused capacity charges.
Valuation-wise, STMicroelectronics is trading at a discount compared to its peers.
Despite the recent setbacks, the company’s long-term prospects in structural growth areas such as energy transition, data centres, and microcontrollers remain strong.
According to some analysts, STMicroelectronics’ net cash position and ongoing investments in capacity expansion and buybacks provide a cushion against the current downturn.
Long-term support broken
While STMicroelectronics’ stock was already in a downtrend on the long-term charts, after yesterday’s move it has broken below its strong support near $34.6, which is not a good sign for bulls.
STM chart by TradingView
Considering the bearish momentum across timeframes, investors who are looking at this dip as a buying opportunity must exercise caution.
If the bearish momentum prevails, the stock will next find support only near $29. So, any long-term bullish positions must only be initiated with a stop loss at $28.8.
Traders who are bearish on the stock can initiate a short position on a minor bounceback near $34 with a stop loss at $36.75. They can book profits above $29.
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