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

Narrow-moat STMicroelectronics reported disappointing first-quarter earnings, provided investors with a gloomy second-quarter forecast, and substantially reduced its revenue forecast for 2024. We’ve viewed ST has having an attractive margin of safety for investors and has been a top pick of ours in semis, exactly because overly pessimistic near-term results were baked into the share price. With the stock up 2% on such gloomy news, we surmise that the market was expecting even uglier results. We will trim our fair value estimates to $60 from $66 (and to EUR 56 from EUR 63 for European shares) based on the lower near-term results and modestly less long-term optimism in discrete semis growth, given a likely rise in competition from Chinese chipmakers. Still, we view ST as fundamentally undervalued and think that too much long-term pessimism is baked into shares today. We remain encouraged with ST’s exposure to the automotive chip space, where we still foresee rising chip content per car, especially as electric vehicles become a growing piece of the automotive pie.