2023-08-07 07:23:07 ET
Summary
- STMicroelectronics's net revenue increased by 12.7% YoY to $4.33bn in Q2 2023, exceeding consensus estimates of $4.27bn.
- STM expects a resilient Q3 thanks to the industrial and auto sectors.
- Higher operating leverage, cash-positive position, and solid demand make STM stock a buy.
Here at the Lab, STMicroelectronics ( STM ) was a 2022 top pick with a strong buy recommendation. Looking back, this was a solid call and is still supported by: 1) a Positive EU Framework (latest STM announcements support our investment thesis) , 2) quarterly solids results with Broad-Based Beats across the cycle, and 3) an ongoing buyback with a favorable cash position at the balance sheet level.
Mare Past Analysis
Q2 results
In Q2, STM closed net revenues up 12.7% year on year, with a positive quarterly evolution of plus 1.9% to $4.33 billion, exceeding the consensus estimate of $4.27 billion. The company's gross margin reached 49%, up by 160 basis points, versus 47.4% recorded in Q2 2022. STM's operating margin reached 26.5% with a net profit of $1 billion, up by 15.5% year on year). Looking at the H1 aggregate, STM revenues amounted to $8.57 billion, with a gross margin of 49.3% and a net profit of $2.05 billion. Q2 sales were above the company's internal guidance set in April.
STMicroelectronics Q2 Financials in a Snap
Source: STMicroelectronics Q2 results presentation
Changes to our estimates and Mare's Upside
Post H1 results, here at the Lab, we would emphasize four key points:
-
We believe STM revenues are entering into a soft downcycle. Reversing the Fiscal Year 2023 guidance, revenue implies a low single-digit growth compared to the plus 16% achieved in H1. However, we see OEM growing (Volkswagen (VWAGY), Renault (RNLSY), Stellantis (STLA), etc.), which will partially offset non-auto sectors such as electronics. Despite that, we positively view STM's effort in revenue diversification (from Apple and lower iPhone sell-out in Q2 ), and this reinforces our buy rating target;
- EBIT margins are forecasted to remain resilient even in a soft cycle. Looking at the P&L, the gross margin is forecasted to decline to 47%+ from 49% in H1. This is mainly due to the lower industrial utilization rate (-100 basis points) and ramp-up costs of new fabs;
- Related to point 2), in H1, STM CAPEX increased to $1.07 billion vs. $0.81 billion recorded in the same period last year. No change in our CAPEX forecast (€4 billion in FY 2023);
- Having listened to the Q&A analyst call, it is now more evident that pricing pressure will be softer than expected, and STM management see no significant price deterioration from Q2 to Q3. Again, this support our 12-month visible period earning growth.
Regarding STM forecasts, the CEO expects Q3 net revenues of $4.38 billion, corresponding to a growth of 1.2% year on year and 1.1% compared to the previous quarter. The gross margin is expected to be around 47.5%, plus or minus 200 basis points. This forecast is based on an estimated exchange rate of approximately $1.1 vs €1. 2023 financial guidances were also confirmed.
STM 2023 financial guidance
Regarding our upside, we positively view the EU chip acts . In addition, last month, STM announced it agreed with GlobalFoundries, a company active in producing feature-rich semis, to create a new JV for large volumes of semiconductors in France. This agreement has a total estimated cost of €7.5 billion between investment CAPEX, maintenance CAPEX, and ancillary costs. There is also the green light of the French state, which will support the new plant with the support of up to €2.9 billion. With this chip fab, France will double chip production by 2028. The aid support contribution is an energy discount in the Power purchase agreement. This should help STM earnings per share to reach €4.65 in 2024. Currently, Europe depends on APAC chip supply, and the EU aims to achieve a 20% share in semis production by 2030. Here at the Lab, we won't be surprised to see additional CAPEX investment of STM in the EU area.
Conclusion and Valuation
The Artificial Intelligence trend helped semis companies at the stock price level. Within the sector, STM lagged, but what we like about the company is its exposure to the automotive and industrial sectors, which we consider more resilient. The European onshoring trend is a trajectory that cannot go unnoticed. Thus, we confirmed our overweight rating with a target price of €60 per share . This valuation is derived with a 2023 forecast EPS of $4.28 with a price-earnings (unchanged) of 16x. By year-end, we estimated a cash position of $4.8 billion. We also forecast an EPS of €4.65 in 2024.
STM is still a top pick within our EU tech coverage. Positive cash position, higher operating leverage, continued investment, and price stability are all positive outcomes that confirm our long-term buy rating target. Downside risks include the iPhone refresh cycle, a negative FX development, lower pricing power, and a slowdown in industrial/auto demand. However, having checked the OEM EV order backlog, we remain confident in a positive growth trajectory.
For further details see:
STMicroelectronics: Another Beat, Still A Buy