STMicro Earnings: We’re Keeping Our Eyes on the Road Ahead in Automotive; Shares Undervalued

Narrow-moat STMicroelectronics STMPA reported solid third-quarter results. The firm’s fourth-quarter outlook was a bit weak because of headwinds in its industrial business, in line with comments from rival Texas Instruments earlier this week, but we’re encouraged by STMicroelectronics’ optimism and visibility into automotive chip growth in 2024. Longer term, we’re confident in STMicroelectronics’ strong position in the secular trend toward higher chip content per car, especially in electric vehicles. We maintain our fair value estimate of $66 per U.S. share, while raising our fair value on French shares to EUR 63 from EUR 60, based on currency effects. We continue to view STMicroelectronics’ shares as materially undervalued, especially for long-term, patient investors willing to ride out the cyclical downturn in the industrial end market.

Revenue in the September quarter was $4.43 billion, up 2.5% year over year, up 2% sequentially, and above guidance of $4.38 billion. Automotive revenue was again the bright spot, up 4% sequentially and 30% year over year, thanks to gains in both silicon carbide-based semis, and chips going into other car applications. Analog, MEMS, and Sensors, or AMS, revenue was up 5% sequentially but down 28% year over year, as ST faces headwinds from a previously disclosed loss of content within Apple’s latest iPhones. Microcontroller, or MDG, revenue, which primarily goes into industrial end markets, also softened with sales down 1% sequentially and 3% year over year. Gross margin was flat year over year at 47.6%, in line with guidance.

For the December quarter, STMicroelectronics expects revenue of $4.3 billion, which would be down 3% both sequentially and year over year, and below our prior estimates and FactSet consensus estimates of $4.42 billion. Industrial chip demand appears to be softening, particularly in China, while content loss at Apple will provide ongoing headwinds to AMS. Automotive chip revenue should remain healthy.