Despite the ongoing chip shortage and other supply chain disruptions, the auto industry continues to witness sustained demand, driven by the growing adoption of electric vehicles (EVs) and supportive government policies. Given the favorable industry backdrop, shares of automotive chipmaker STMicroelectronics N.V. (STM) have seen considerable investor interest lately because of its fundamental strength and solid growth prospects.

Headquartered in Geneva, Switzerland, STM produces sensors and microcontrollers for cars, industrial machinery, and smartphones. The company operates through three segments: Automotive and Discrete Group (ADG); Analog, MEMS, and Sensors Group (AMS); and Microcontrollers and Digital ICs Group (MDG). The automotive market accounts for more than a third of the company’s revenues.

Since the company’s products do not fall under the category for which the United States has imposed an export ban, it has not been affected like many other chipmakers.

The company delivered solid third-quarter results. Its net revenues of $4.32 billion and gross margin of 47.6% came in above the mid-point of its business outlook range, driven by strong demand for its product portfolio. On a year-over-year basis, its operating margin grew to 29.4% from 18.9% in the year-ago quarter, and net income more than doubled to come in at $1.10 billion.

STM’s fourth quarter business outlook for net revenues is $4.40 billion (at the mid-point), up 23.7% year-over-year and 1.8% sequentially. Its gross margin for the current quarter is expected to be about 47.3%. The midpoint of full-year 2022 net revenues of $16.10 billion represents an increase of 26.2% year-over-year.

On October 5, STM announced building an integrated Silicon Carbide (SiC) substrate manufacturing facility in Italy to support the increasing demand from customers for SiC devices across automotive and industrial applications. The facility’s production is expected to start in 2023, enabling a balanced supply of SiC substrate between internal and merchant supply.

This project is a key step in advancing the company’s vertical integration strategy for its SiC business.

Furthermore, STM introduced Stellar P6 automotive microcontrollers (MCUs) for EV platform system integration in September. The new real-time, power-efficient MCUs combine advanced integration of motion-control and energy-management domains with actuation capabilities, enabling a smooth transition from traditional EVs to new drive-traction architectural patterns of software-defined vehicles.

STM has declined marginally over the past month to close the last trading session at $31.32. However, Wall Street analysts expect the stock to hit $48.00 in the near term, indicating a potential upside of 53.3%.

Here is what could influence STM’s performance in the upcoming months:

Robust Financials

For the fiscal 2022 third quarter ended September 30, 2022, STM’s net revenues increased 35.2% year-over-year to $4.32 billion, and its gross profit rose 54.7% from the year-ago value to $2.06 billion. The company reported an operating income of $1.27 billion, up 110.1% year-over-year.

Furthermore, the company’s net income and earnings per share came in at $1.10 billion and $1.16, representing increases of 131.8% and 127.5% year-over-year, respectively. Net cash from operating activities improved 84.5% year-over-year to $1.65 billion. Also, its non-GAAP free cash flow came in at $676 million, up 61% year-over-year.

Favorable Analyst Estimates

Analysts expect STM’s revenue for the fiscal 2022 fourth quarter (ending December 2022) to come in at $4.40 billion, indicating an increase of 23.9% year-over-year. The consensus EPS estimate of $1.12 for the ongoing quarter indicates a 36.5% year-over-year increase. It’s no surprise that the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.

In addition, the company’s revenue and EPS for the current fiscal year (ending December 2022) are expected to increase 23.9% and 36.5% year-over-year to $4.40 billion and $1.12, respectively.

Higher-than-industry Profitability

In terms of trailing-12-month EBIT margin, STM’s 26.27% is 263.6% higher than the 7.22% industry average. Its trailing-12-month EBITDA margin of 33.82% is 177.7% higher than the industry average of 12.18%. Likewise, its 22.69% trailing-12-month net income margin is 512.2% higher than the industry average of 3.71%.

Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 35.64%, 20.02%, and 18.94% compare to the industry averages of 6.51%, 3.72%, and 2.16%, respectively. Its trailing-12-month CAPEX/Sales of 20.67% is 800.4% higher than the industry average of 2.30%.

Discounted Valuation

In terms of its forward non-GAAP P/E, STM is trading at 7.86x, 57.3% lower than the industry average of 18.40x. The stock’s forward EV/Sales multiple of 1.69 is 37.1% lower than the industry average of 2.69. Moreover, its forward EV/EBITDA of 4.87x is 60.1% lower than the industry average of 12.19x.

Also, in terms of forward Prices/Sales, the stock is currently trading at 1.78x, 29.9% lower than the industry average of 2.54x. Its forward Price/Cash Flow multiple of 5.67 is 66.1% lower than the industry average of 16.74.

POWR Ratings Show Promise

STM has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a B grade for Quality, in sync with its higher-than-industry profitability. In addition, it has a B grade for Growth and Sentiment, consistent with its solid revenue and earnings estimates.

STM is ranked #2 out of 92 stocks in the B-rated Semiconductor & Wireless Chip industry. Click here to access STM’s POWR ratings for Value, Stability, and Momentum.

Bottom Line

STM delivered strong top and bottom-line growth in its last reported quarter and affirmed continued full-year 2022 performance. The solid business outlook reflects sustained consumer demand for its diversified portfolio. Furthermore, Wall Street analysts see significant upside potential in the stock.

Therefore, it could be wise to invest in STM to capitalize on the auto industry’s long-term growth.

How Does STMicroelectronics N.V. (STM) Stack Up Against its Peers?

STM has an overall POWR Rating of A, equating to a Strong Buy. Check out these other stocks within the Semiconductor & Wireless Chip industry with an A (Strong Buy) rating: United Microelectronics Corp. ADR (UMC), Renesas Electronics Corporation (RNECF), and Xperi Corporation (XPER).

STM shares fell $0.03 (-0.10%) in premarket trading Wednesday. Year-to-date, STM has declined -35.66%, versus a -18.10% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

More...