SiC-Driven STM

STMicroelectronics saw tremendous growth in the last three years because of the secular trends in automotive digitalisation and electrification, consumer electronics, IoT devices, and smart power and energy management. Additionally, supply shortages during the COVID-19 crisis encouraged end customers to keep higher levels of inventory and the company grew by 25%, 26%, and 7.2% in the last three fiscal years. However, the slowdown in the Electrical vehicle’s adoption by consumers, and a strong inventory correction in Industrials has left the stock reeling in 2024 ytd as can be seen in below.

STMicroelectronics' underperforming share in 2024



However, with its excellent portfolio of products in smart mobility and its undisputed leadership in Silicon Carbide (SiC) applicable to both automotive as well as power and energy markets, and growing market opportunities in cloud-connected autonomous things and edge AI, we believe this is again the right time to invest in the company.

Chinesefears and Q1 24 results 

 

In its Q1 24 results, the company provided lower-than-consensus Q2revenue guidance of $3.2bn ($3.8bn expected) and revised its FY 24 revenueguidance downwards by around 20% from $16-17bn to $14-15bn.

Simultaneously,news from the Chinese government about its goals for local carmakers to sourcea quarter of their semiconductor chips domestically by 2025 has raised concernsabout potential market share erosion in the world's largest electric vehicle (EV)market. Companies with significant exposure to power semiconductors andmicrocontrollers have faced increased pressure over the past few months due togrowing speculation about intensifying competition from domestic semiconductorvendors in China. Consequently, STMicroelectronics' share price has beentrending downwards due to these factors.

However, we do believe that the idea of market erosion inAutomotive chips may be overblown and recent news regarding STM’s long-termSilicon Carbide (SiC) supply agreement with Chinese automobile manufacturerGeely confirms our belief. 

Gradual recovery is set to come

 

STM is currently affected by a large inventory correction in theindustrial market and slowing demand in the automotive market. Out of the total$2bn revenue revision for FY 24, the company reported that a $1.3bn cut is fromthe Industrial market and a $0.6bn cut is from the automotive market. Thereduction in Industrial is mainly due to the longer time taken for inventorycorrection at the end customers while the reduction in Automotive is due to oneof its main customers' demand adjustment (we think Tesla) and also due to lowerelectrical car production estimated for this year as consumers focus on hybridsrather than pure EVs (at least outside China).


After posting sales reductions for four consecutive quarters in the microcontrollers division, the company reported in its Q1 conference call that it is seeing some green shoots and that Q2 would be the bottom point. ST has already largely reset expectations for 2024, and we believe a cyclical recovery could gradually build up from Q3 due to the seasonal strength in personal electronics demand, a correction in Industrial end markets, and EV growth from China.


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