STMicro Earnings: Strong Medium-Term AI Demand Offsets Modest Near-Term Weakness

Key Morningstar Metrics for STMicroelectronics

• Fair Value Estimate
  : $72.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : Very High

What We Thought of STMicroelectronics’ Earnings

STMicroelectronics STM reported second-quarter revenue of $3.49 billion, up 26% year over year and above the midpoint of guidance. ST forecasts third-quarter revenue of $3.70 billion, up 16% year over year but below FactSet consensus estimates of $3.79 billion.

Why it matters: STMicro’s third-quarter revenue forecast was below our expectations, but we’re not alarmed. The firm will have softer sales into personal electronics, due to high memory prices, and it’s facing some tight supply in its core end markets.

• Overall, STMicro is still seeing high demand for artificial intelligence products, especially in optical components. Industrial revenue has snapped back nicely from a prior cyclical downturn, and automotive revenue is picking back up.
• We’re encouraged that the firm lifted its 2027 AI forecast to “well above $2 billion,” and we believe it has high visibility into these revenue engagements.

The bottom line: We maintain our $72 per share fair value estimate for narrow-moat STMicro. Shares sold off about 14% on the revenue miss, which we think is punitive, but investors were likely seeing a stronger forecast after a massive run-up in many semis stocks in recent weeks.

• Shares now appear modestly undervalued to us, and we like STMicro’s exposure to AI and low-earth orbit satellites. Lower PE sales may be a near-term headwind, but it doesn’t affect our long-term thesis.

Coming up: STMicro’s third-quarter revenue forecast was modestly below our expectations, as was its gross margin forecast of 37%, which we attribute to lower sales levels and some stubborn manufacturing reshaping costs. Still, we think the company’s longer-term gross margin expansion potential is on track.

• ST forecasts fourth-quarter revenue at $4.0 billion, an acceleration over its third-quarter forecast but still below our prior expectations, which we again attribute to PE weakness.