This Chip Supplier to Tesla and Apple Gets a Boost as Shortages Continue
Dutch-Swiss chip maker STMicroelectronics , along with many of its peers, has seen business boom on the back of rising global demand and supply constraints.
That, in turn, led the Tesla and Apple supplier—which designs, develops, and makes semiconductors—to post fourth-quarter revenue ahead of guidance in January. And it has driven up the Paris-listed stock (ticker: STM.France) about 6% in the past 12 months to 34.75 ($37.84) euros.
While the stock has tumbled about 20% this year, the investment case remains strong. The Geneva-based company, which also has listings in Milan and New York, is set apart from its peers because its broader customer base spans a range of sectors, such as automotive and industrial, which accounted for about 35% of 2021 sales. Many of these sectors are expanding, and this diversity also offers protection.
STM can also provide an element of certainty in terms of 2022 revenue guidance, which is expected to rise 20% to a range between $14.8 billion and $15.3 billion because its order book for the year is full.
While peers slowed down investment in capital expenditures during the pandemic, STM continued to spend, and said in January that it will double investment in chip making facilities to about $3.5 billion in 2022, up from $1.8 billion in 2021. This will include a new factory in Italy.
Johannes Schaller, an analyst at Deutsche Bank Research, wrote in a note: “We retain our bullish stance on the stock…which we see in a unique position being able to deliver highly cost-efficient capacity into a tight market.” He thinks the stock could jump about 45% to €52.
This efficient production keeps costs low at the same time that product prices are climbing because of the supply squeeze, and this combination means the company is able to deliver healthy gross profit margins of 45%.
Aleksander Peterc, an analyst at Société Générale, says these margins should comfortably offset any increased input costs. He lifted STM’s revenue estimates to $15 billion for 2022 and $16.5 billion for 2023, predicting reported net income would increase to $3.22 billion for 2023. And he argued in a note that STM’s valuation is at an “unusually high discount” to both its peers and to historical earnings-based 12 month forward multiples.
STM employs more than 48,000 employees and has a market value of €32.3 billion. It fetches a low 12.2 times this year’s expected earnings, and while it is valued in line with its peers, rival Broadcom (AVG) trades at 16.95 this year’s expected earnings, and Analog Devices (ADI) at 19.12.
For the year ended Dec. 31, 2021, STM posted net sales of $12.7 billion, up from $10.2 billion the previous year. It saw net income almost double to $2 billion in 2021 from $1.1 billion. STM will post first-quarter earnings later this month.
“In 2022 we will accelerate the execution of our strategy, continuing to deliver differentiating products to customers for smart mobility, improved power and energy management, and the IoT and 5G,” CEO Jean-Marc Chery told Barron’s. “We will invest significantly to capture new opportunities and prepare for future growth, keeping our strong focus on sustainability.”
A dynamic market is set to last well into 2023, with favorable inventory levels, continued supply-chain issues, heightened price changes, and high order levels.
A survey of 120 industry respondents issued by Berenberg in March revealed half of respondents believe the supply chain/shortage won’t ease in 2022, and half of them suggested it may get worse before it improves. Customer demand has continued to grow since early 2021, and just a small number of respondents reported a slight drop in order levels recently.