I'll preface this by saying I'm just an amateur retail investor and I'm self-taught so please be gentle in case I have misunderstood something. Here goes.
STMicroelectronics (STM) is the best and one of the most undervalued European stocks in my opinion. If you look at valuation, their potential and current numbers it's insane. Honestly I think you could make your money several times over with this one (3x, 4x bagger potentially) in the the medium-term.
STM makes chips for automotive, energy, industrial mainly, plus personal electronics, sensors and that kind of thing (so not CPUs or GPUs like NVDA or Intel or whatever, instead their competitors are ON Semi, Infineon, etc.). Among their clients you can find Apple, Tesla, Google, META, SpaceX, Huawei, Stellantis, Airbus + a myriad of others. They are the main chip supplier of some of these companies.
First things first, valuation is really super low. STM typically traded around 15-25 PE in the years before and since the pandemic (around 16 PE in 2021, and 24 in 2020-21), which is more or less typical for the sector). It's now been less than 10PE (going as low as 7) for like a year (as of writing this post it is around 9), and the stock was shorted to death throughout 2022 and even parts of 2023. Looking at the whole picture (zoom out on the chart) its price has really gone nowhere despite the fact they grew revenues and profits 20% over 2022, and those profits and revenue levels have proven quite resilient throughout 2023. They've had gross margins close to 50% for the past couple of years essentially. How can one explain this? From my limited knowledge of the industry, I think a lot of people (most analysts) thought their margins would collapse back down, because for over 10-15 years (before the pandemic) the chips STM made were effectively bought & sold as commodities and were very cheap (STM had really low margins over this period). Everyone thought that the new 40%+ gross margins STM was achieving during and right after the pandemic were a fluke and that STM would go back to having its old terrible margins once things calmed down. Right now, it looks like that thesis is proving to be wrong and the new margins STM is achieving and everything else is basically holding up. They have pricing power now.
Automotive is their main segment nowadays (as well as their most profitable) and even in the current “EV slowdown” they are expecting 30% y-o-y growth for that segment. Their second most significant segment is the personal electronics/PC market, which seems to be turning a corner already after a long period of inventory correction (from which they seem to be coming out of basically unscathed, I saw Samsung is planning to increase prices soon on many of their sensors, which STM also makes, it looks like a positive sign to me regarding demand in the sector). Currently, their third main segment is the industrial market which is their most shakey segment at the minute but even that looks like it may just basically hold up more or less where it currently is.
A few things to note for investors, they don't “reward” shareholders with a lot of buybacks or dividends currently because their deal is that they re-invest 75% of their cash flow into new fabs (4bn net CapEx this year for example, plus they are getting a ton of subsidies in the context of reshoring chip production in Europe, etc.), focusing on increasing the company's fundamental value in that way. They have a stated objective of 20bn revenue for 2025-2027 with 50% gross margin.
Currently their net margin is around 27-30%. They were at 15bn yearly revenue in 2022 and this year will end up around 17bn total revenue. If they get more efficient as the new fabs ramp-up, which is always the case in the industry as I understand, I can see their margins holding up and them reaching their stated objectives in 2025-2026 depending on the macro picture. They are perfectly positioned for the major transitions the whole world is driving to (transport electrification, edge AI, industrial automation, renewable energy, etc.)
Here are some stats based on the last 12 months:
Gross margin TTM 47.21%
Operating margin TTM 29.4%
Net Profit margin TTM 27.23%
Return on Investment TTM 28.1%
Their current net cash position is around 2.5bn, reflecting liquidity of 5bn and total debt of 2.5bn. Over the last 4 quarters, they have had revenues between 4.2bn and 4.5bn per quarter, achieving 1bn+ net income in each quarter (which they are re-investing massively in expanding the company as mentioned above).
I have been following this stock for a couple of years at this point and it has been baffling to me how it hasn't taken off much more than this. I get it that it's the CAC40 and not the S&P or Nasdaq, but still they have an ADR and honestly I can see STM becoming one the main and most well-known European stocks in the near-future once the new business cycle really takes off (possibly sooner than later at this point?).
Leave a Reply