The semiconductor industry is not entirely immune from economic headwinds. However, increasing consumption of consumer electronic devices, coupled with the emergence of advanced technologies that require advanced memory chips, could provide enhanced opportunities for market development.
Given this backdrop, let’s find out whether global semiconductor product designer, manufacturer, and seller STMicroelectronics N.V. (STM), could be an ideal portfolio addition.
Headquartered in Geneva, Switzerland, STM is a global semiconductor leader serving customers across the spectrum of electronics applications. The company introduced the second generation of its STM32 MPUs (microprocessors), coming with a new architecture and raising performance and security for applications at the industrial and IoT edge.
Moreover, STM updated its outlook on the backs of its stronger-than-anticipated quarterly results. For the fiscal second quarter ending July 1, 2023, STM expects its net revenues to be $4.28 billion, up 0.8% sequentially (plus or minus 350 basis points). Likewise, STM expects a gross margin of 49% (plus or minus 200 basis points).
The stock has gained 13.6% over the past six months and 2.5% intraday to close the last trading session at $43.54. Wall Street analysts expect the stock to reach $63 in the upcoming 12 months, indicating a potential upside of 44.7%.
Here are the factors that could influence STM’s performance in the upcoming months:
For its fiscal first quarter that ended April 1, 2023, STM’s net revenues increased 19.8% year-over-year to $4.25 billion, while its operating income increased 36.9% year-over-year to $1.20 billion.
During the same quarter, net income attributable to parent company stockholders increased 39.8% year-over-year to $1.04 billion. Earnings per share attributable to parent company stockholders stood at $1.10 per share, up 39.2% year-over-year.
Moreover, STM’s free cash flow for the same quarter stood at $206 million, up 151.2% year-over-year. The company’s total current assets stood at $10.36 billion as of April 1, 2023, compared to $7.98 billion as of April 2, 2022.
In terms of forward EV/EBITDA, STM is trading at 6.35x, 53.2% lower than the industry average of 13.58x. Its forward EV/Sales and Price/Sales multiple of 2.18 and 2.27 are 18.3% and 12.7% lower than the 2.67 and 2.60 industry averages, respectively.
STM’s trailing-12-month net income margin of 27.45% is significantly higher than the industry average of 2.39%. Likewise, its trailing 12-month ROCE, ROTC, and ROTA of 39.22%, 21.22%, and 21.79% are significantly higher than the industry averages of 1.04%, 2.24%, and 0.36%, respectively.
The company announced an annual dividend of $0.24 per outstanding share of the company’s common stock, to be distributed to shareholders in quarterly installments of $0.06 in each of the second, third, and fourth quarters of 2023 and the first quarter of 2024.
Its annual dividend translates to a 0.56% yield on the current price level. Its four-year average dividend yield is 0.72%. The payout ratio is 5.33%.
Favorable Analyst Estimates
The consensus EPS estimate of $1.08 for the fiscal second quarter (ending June 2023) and $4.21 for the current year (ending December 2023) indicate 16.9% and 0.6% year-over-year increases, respectively.
Likewise, the consensus revenue estimates for the same periods of $4.28 billion and $17.37 billion reflect 11.6% and 7.7% year-over-year improvements, respectively. Moreover, STM topped consensus EPS and revenue estimates in all the trailing four quarters, which is impressive.
POWR Ratings Reflect Promising Outlook
It is no surprise that STM has an overall A rating, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. STM has a grade A for Value, in sync with its discounted valuation.
In addition, the stock is rated a B grade for Quality, consistent with its strong profitability. Also, the favorable analyst estimates justify its B grade for Sentiment.
STM ranks #4 in the 91-stock Semiconductor & Wireless Chip industry.
Beyond what we have mentioned above, to see the STM’s additional POWR Ratings for Momentum, Growth, and Stability, click here.
The emergence of advanced technologies, such as Artificial Intelligence (AI), Machine Learning (ML), and the Internet of Things (IoT), has raised the demand for high-functioning chips. Consequently, the global semiconductor market is projected to reach $1.39 trillion by 2029, growing at a CAGR of 12.2%.
Besides significant industrial tailwinds, STM’s strong financial performance, robust profitability, and dividend payouts could provide a stable return to its shareholders amid a volatile economic scenario. Therefore, this stock could be a wise portfolio addition now.
How Does STMicroelectronics N.V. (STM) Stack Up Against Its Peers?
While STM has been rated A, equating to a Strong Buy, one can check out these other stocks within the Semiconductor & Wireless Chip industry: SUMCO Corporation (SUOPY), Renesas Electronics Corporation (RNECF), and Infineon Technologies AG ADR (IFNNY), which also have an A (Strong Buy) rating.
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STM shares were trading at $44.34 per share on Thursday morning, up $0.80 (+1.84%). Year-to-date, STM has gained 24.79%, versus a 9.59% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors. More...
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