2024-01-08 13:36:00 ET
Summary
- Chinese authorities are limiting the use of foreign smartphones and tablets. This affects Apple and STM.
- Mobileye's revenue warning cannot go unnoticed. In addition, we are updating our estimates on the evolution of the exchange rate.
- Compelling valuation vs. the sector, solid demand, and strong execution make STM a buy.
No sooner said than done, following our last analysis called Let's Take Advantage Of A 20% Decline , STMicroelectronics (STM) is up by the same amount. Here at the Lab, we have a long-standing buy rating on the semi Group, and this is based on 1) a Positive EU Framework with the Chips Act, 2) car deliveries still below pre-COVID-19 levels with more chips in the electric vehicles, and 4) an unjustified discount to PHLX Semiconductor Sector Index performance, despite the company's strong execution and solid sector backlog. However, there are three risks that we are pricing in our forward 12-month estimates. Therefore, we are maintaining our buy rating target today, but lowering STM's target price to €57 per share.
Three Ongoing Risks and Changes in Estimate
Recently, Mobileye Global Inc. reported a build-up of excess inventory by significant customers and updated the investor community with a warning. In detail, the US autonomous driving systems company has launched a warning on revenues and now expects a 50% drop in sales in Q1 2024. The stock lost 25% in a single day and over $14 billion in market cap. This was the worst session in Mobileye's stock price history. Looking at the press release, Mobileye explained how revenues will be " significantly lower " than the $458 million achieved in Q1 2023. Cross-checking the FactSet consensus, analysts forecasted sales for $557.1 million in January-March. Here at the Lab, we have significant exposure to areas of the market that will benefit from structural & secular growth. Lately, our investment areas have been semiconductors and technology companies. Companies such as STM and Infineon are exposed to the automotive sector, where the transition to EV and autonomous driving will significantly increase the presence of semiconductors.
On a negative note, many Chinese public authorities are asking their employees not to use foreign smartphones and tablets and to favor using Chinese devices. This trend is not new. Last September , the request had already started with the Beijing and Tianjin government agencies. The request has spread to at least eight provinces, including the most populous ones on the coast. From a legal point of view, this directive has been in force for several years. Still, in recent months, there has been a growing push from Beijing to reduce its dependence on foreign, especially American, technologies. The ban aims to reduce reliance on US corporations and, on the contrary, to promote national companies. Even small businesses are issuing directives to limit American device use. In this context, assessing the impact is still somewhat challenging, but this ban has repercussions for Apple (AAPL) and STM. Looking back, we believe this is not a coincidence, and there has been an acceleration in Huawei's production. Among the semiconductor producers, STM is most exposed to the personal electronics and communications segment, with Apple being the critical client. According to our estimates, STM is exposed to the segment for 30%, and Apple represents at least 15% of the company's total sales. Related to the American company, Apple relies heavily on China for revenue and production growth. China's economy accounts for about a fifth of the Cupertino company's total revenue, and Chinese iPhone sales exceeded those in the United States in the last quarter.
Looking at the current FX, we updated our STM €/USD exchange rate number. At the aggregate level, the €/dollar exchange rate does not favor companies that produce electronic components and semiconductors. With the euro strengthening against the dollar, this is a negative take on STM. We should remind our readers that 90% of STM sales are in US dollars. In our estimates, our 2024 sales expectations are now adjusted with a turnover and profits based on a euro/dollar exchange rate of 1.10 (while our previous estimate was set at an exchange rate of 1.05). This changes our 2024 earnings per share numbers results by minus 4%.
Related to our 2023 financial forecast, we decided to leave our previous number unchanged, with $17.4 billion in sales and an EBIT of $4.7 billion. Still, depending on the Q4, we believe STM will reach a yearly sales of up to 8%. Given the FX, lower-than-expected EV pick-up, and potential Chinese iPhone sales issues, we are lowering 2024 turnover to $17.5 billion, forecasting a core operating margin of 23.7%. Therefore, we estimate STM EBIT will move from $4.7 billion to $4.15 billion in the next twelve months. On a positive note, rolling forward our valuation and considering the company's CAPEX plan, we arrived at a favorable cash position of $7 billion at the 2024 end.
Conclusion and Valuation
Our previous 2024 EPS was set at $4.57. With our EBIT margin declining from 27.2% to 23.6% in 2024, we arrived at an updated EPS of €3.57. Despite that, STM has a surplus FCF and a cash-positive balance. Looking at the valuation, the company trades with a forward EV/EBITDA multiple of 6x and a P/E of 9.5x, compared to a sector trading at double-digit multiples. For this reason, we are leaving our 16x P/E target unchanged, but as a consequence of a lower EPS, we decreased our valuation from €60 to €57 per share. Our valuation is also supported by an industry median EV/EBITDA of 10x and a reverse discount cash flow with a WACC of 9% and a perpetual growth rate of 3%. Our downside risks include the weakening of the $/€ FX, a slowdown in consumer electronics, and GDP growth. Regarding company-specific risk, aside from the technology product life cycles (iPhone), the Chinese restrictions could impact STM's P&L and its growth capacity. CAPEX execution and utilization rate are also two vital risks factoring into our consideration.
For further details see:
STMicroelectronics: 3 Risks To Be Priced In