STMicro Earnings: We Still See an Attractive Margin of Safety Despite a Poor First-Half Forecast

Key Morningstar Metrics for STMicroelectronics

• Fair Value Estimate: $60.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of STMicroelectronics’ Earnings

STMicroelectronics STM reported disappointing first-quarter earnings, provided a gloomy second-quarter forecast, and substantially reduced its 2024 revenue forecast. Morningstar has viewed STMicro as having an attractive margin of safety (and it’s been a top pick in semis) because overly pessimistic near-term results were baked into the share price. With the stock up 2% on such gloomy news, it appears the market was expecting even uglier results.

We have trimmed our fair value estimate of STMicro to $60 per share from $66 based on the lower near-term results and modestly lower long-term optimism for discrete semis growth, given a likely rise in competition from Chinese chipmakers. Still, we view the firm as fundamentally undervalued and think that too much long-term pessimism is baked into its shares. Its exposure to the automotive chip space, where we still foresee rising chip content per car, remains encouraging, especially as electric vehicles become a growing piece of the automotive pie.

Revenue was $3.465 billion, down 19% sequentially, down 18% year over year, and below guidance of $3.6 billion. The company attributed the miss to slowing demand for automotive semis, partly because of a slowdown in production at key customer Tesla TSLA, as well as some inventory overhang at other car OEMs. Industrial chips also fared a bit worse than expected due to an inventory correction, consistent with the ugly results seen by peers.

STMicro expects June-quarter revenue of $3.2 billion, well short of our prior estimates and FactSet consensus estimates of $3.78 billion. This would represent declines of 8% sequentially and 26% year over year. The firm thinks the second quarter will be the revenue bottom, but the sluggish start to the first half caused it to reduce its full-year revenue forecast to $14.5 billion at the midpoint, down from $16.4 billion.