GENERAL ANALYSIS
Company Description
STMicroelectronics, often referred to as ST, is a multinational semiconductor manufacturer headquartered in Geneva, Switzerland. Founded in 1987 through a merger of two prominent European semiconductor companies, SGS Microelettronica (Italy) and Thomson Semiconducteurs (France), STMicroelectronics has grown to become one of the world's largest and most influential semiconductor companies.
This global semiconductor company designs, manufactures, and markets a wide range of electronic components and systems. The main customers of STMicroelectronics include automotive OEMs, mobile phone manufacturers such as Nokia, Samsung, LG; printer manufacturers like HP, hard disk manufacturers such as Seagate Technology, Western Digital; manufacturers of consumer electronics like Philips, Sony, Thomson, Nintendo, and Microsoft. Finally, there are industrial equipment manufacturers like Siemens.
STMicroelectronics in this way can serve various industries, including automotive, industrial, consumer electronics, and communications. The company's products are integral components in devices and systems manufactured by other companies globally. STM operates manufacturing facilities and research and development centres in different countries, ensuring a broad geographic reach and effective support for its customers.
Core Business Areas
1. Semiconductors: STM produces a variety of semiconductor products, including microcontrollers, application processors, digital signal processors (DSPs), memory chips, and analog and mixed-signal devices. These components are used in a multitude of applications, ranging from consumer electronics and automotive systems to industrial equipment and IoT (Internet of Things) devices.
2. Automotive Solutions: STM provides a comprehensive range of automotive electronics solutions, including microcontrollers, power management chips, sensors, and connectivity solutions. These products are used in advanced driver-assistance systems (ADAS), vehicle electrification, engine control, and in-cabin systems, among others.
3. Industrial and Power Discrete Semiconductors: STM manufactures discrete semiconductor devices such as power transistors, thyristors, and rectifiers. These components are essential for power management applications in industrial systems, renewable energy, and motor control.
4. MEMS (Micro-Electro-Mechanical Systems) Sensors: STM is a leading producer of MEMS sensors, including accelerometers, gyroscopes, and magnetometers. These sensors are crucial for applications like motion sensing, navigation, and environmental monitoring in consumer electronics and automotive systems.
5. Analog and Power ICs: STM designs and manufactures a wide array of analog and power management integrated circuits (ICs). These ICs are used in diverse applications, such as energy management, smart grid systems, and precision control in industrial processes.
6. Imaging Solutions: STM develops imaging solutions, including CMOS image sensors, that are used in a range of applications, from smartphones and tablets to automotive cameras and industrial vision systems.
Industry Overview and Competitive Positioning
Diverse Product Portfolio: STMicroelectronics is known for its extensive range of semiconductor products, including microcontrollers, analog, and mixed-signal ICs (Integrated Circuits), power management devices, sensors, MEMS (Micro-Electro-Mechanical Systems), and more. Their products find applications in various industries, including automotive, industrial, consumer electronics, and IoT (Internet of Things).
Global Presence: The company has a global presence with a network of manufacturing and research and development facilities in various countries, including the United States, France, Italy, China, Malaysia, and the Philippines. This extensive global footprint allows them to serve a wide range of markets and customers.
Innovation and Research: STMicroelectronics places a strong emphasis on research and innovation. They have a significant focus on developing cutting-edge technologies, such as sensors for autonomous driving, smart power solutions, and IoT devices. Their MEMS technology, for example, is widely used in applications like accelerometers and gyroscopes.
Automotive and Industrial Markets: The company is a significant player in the automotive and industrial sectors, providing essential semiconductor solutions for these markets. Their products are used in various automotive applications, including advanced driver assistance systems (ADAS) and electric vehicle (EV) components.
In our 3-statement analysis we take in consideration the main components in the product portfolio, namely: Automotive and Discrete Group, Analog, MEMS and Sensors Group and finally Microcontrollers and Digital ICs Group
Automotive and Discrete Group
Our analysis strongly suggests that the Automotive and Discrete Group is on track for remarkable growth. Projected net revenues are expected to reach $14.8 billion by 2027, with a notable peak in growth anticipated in 2023 at approximately 46%. This growth is primarily driven by three significant factors: Vehicles Electrification, Vehicle Digitalization, and Overall Automotive Expansion. We expect the Vehicles Electrification serviceable market to grow from $8.65 billion in 2022 to $23.31 billion in 2027 with a CAGR of 22%. The Vehicle Digitalization serviceable market is projected to increase from $11.7 billion in 2022 to $23.2 billion in 2027, with a CAGR of 15%. The Overall Automotive serviceable market is expected to expand from $346.85 billion in 2022 to $925.71 billion in 2027, driven by a CAGR of 22%.
Analog, MEMS, and Sensors Group
The Analog, MEMS, and Sensors Group is well-positioned for revenue growth over the next five years, with a consistent average growth rate (CAGR) of 10% from 2022 to 2027. Within the analog segment, we anticipate growth from $2.22 billion in 2022 to $3.7 billion in 2027, reflecting a CAGR of 11%. Key drivers within this segment include the Motion Control market, Smart Grid & Industrial IoT market, Power Converters and Inverters, and Power Management for Integrated Circuits (PMIC). For MEMS and Optical sensing solutions, we expect growth from $3.7 billion in 2022 to $5.7 billion in 2027, with a CAGR of 9%. This growth is fueled by increasing demand in the smartphone market, personal computer market, and the automotive sensors for telematics and safety market.
Microcontrollers and Digital ICs
STMicroelectronics maintains a dominant position in the market, particularly in the 32-bit microcontroller integrated circuits designed for industrial applications, where it holds a substantial 23% market share. We anticipate significant growth in the global microcontroller market, forecasted to expand from $28.2 billion in 2022 to $44.35 billion by 2027, with a Compound Annual Growth Rate (CAGR) of 9%. STMicroelectronics is well-positioned to fully capture this expansion, benefiting from its strong market presence and expertise in this area. In the realm of digital integrated circuits (ICs), based on ST's estimations, the serviceable market (SAM) for GHz Wireless band is projected to experience remarkable growth. It is expected to increase from $1.85 billion in 2022 to $7.52 billion in 2027, with an impressive CAGR of 32%. This growth underscores ST's potential to capitalize on the growing demand for wireless technologies and digital ICs in this segment.
Overall, STMicroelectronics is in a favorable position to benefit from these market trends and seize opportunities for further growth and market expansion.
SWOT Analysis
Strengths
Strong Brand Portfolio – Over the years STMicroelectronics N.V. has invested in building a strong brand portfolio. This brand portfolio can be extremely useful if the organization wants to expand into new product categories.
Strong distribution network – Over the years STMicroelectronics has built a reliable distribution network that can reach majority of its potential market.
Highly skilled workforce through successful training and learning programs. STMicroelectronics N.V. is investing huge resources in the training and development of its employees resulting in a workforce that is not only highly skilled but also motivated to achieve more.
Superb Performance in New Markets – STMicroelectronics N.V. has built expertise at entering new markets and making success of them. The expansion has helped the organization to build a new revenue stream and diversify the economic cycle risk in the markets it operates in.
Good Returns on Capital Expenditure – STMicroelectronics N.V. is relatively successful at the execution of new projects and generated good returns on capital expenditure by building new revenue streams.
Strong Free Cash Flow – STMicroelectronics N.V. has strong free cash flows that provide resources in the hand of the company to expand into new projects.
Weaknesses
Synergies – Not highly successful at integrating firms withdifferent work culture. As mentioned earlier even though STMicroelectronics N.V. is successful at integrating small companies it has its share of failure to merge firms that have different work culture.
Challenges by entrants – The company has not been able to tackle the challenges present by the new entrants in the segment and has lost small market share in the niche categories. STMicroelectronics N.V. has to build internal feedback mechanism directly from sales team on ground to counter these challenges.
Scarce R&D benefits – Investment in Research and Development is below the fastest growing players in the industry. Even though STMicroelectronics N.V. is spending above the industry average on Research and Development, it has not been able to compete with the leading players in the industry in terms of innovation. It has come across as a mature firm looking forward to bring out products based on tested features in the market.
Opportunities
Success in similar product fields – Organization’s core competencies can be a success in similar other products field. A comparative example could be GE healthcare research helped it in developing better Oil drilling machines.
Green Drive – Government green drive also opens an opportunity for procurement of STMicroelectronics N.V. products by the state as well as federal government contractors.
New environmental policies – The new opportunities will create a level playing field for all the players in the industry. It represent a great opportunity for STMicroelectronics N.V. to drive home its advantage in new technology and gain market share in the new product category.
Opening up of new markets – The adoption of new technology standard and government free trade agreement has provided STMicroelectronics N.V. an opportunity to enter a new emerging market.
Threats
Intense competition – Stable profitability has increased the number of players in the industry over last two years which has put downward pressure on not only profitability but also on overall sales.
Local distributors – Growing strengths of local distributors also presents a threat in some markets as the competition is paying higher margins to the local distributors.
Imitation – Imitation of the counterfeit and low-quality product is also a threat to STMicroelectronics N.V.’s product especially in the emerging markets and low income markets.
New technologies by competitors – New technologies developed by the competitor or market disruptor could be a serious threat to the industry in medium to long term future.
FINANCIAL ANALYSIS
Overview
STMicroelectronics N.V. is poised at a mature stage, firmly establishing itself in the market. Operating in a well-developed industry dominated by a handful of major producers, the company has harnessed its expertise to thrive. In recent years, the industry's importance has soared as a result of surging trends in vehicle electrification, digitalization, industrial embedded processing, and the increasing complexity of personal electronics. Additionally, the demand for more sophisticated communications equipment, computers, peripherals, and artificial intelligence has further amplified the industry's turnover.
STMicroelectronics has demonstrated remarkable financial performance in recent years, with impressive growth and strong profitability indicators. From 2018 to 2022, the company's net revenues have recorded a robust Compound Annual Growth Rate (CAGR) of 14%. Notably, the most recent period, from 2021 to 2022, witnessed exceptional net revenue growth, exceeding 26%. The company's profitability is evident in its consistently healthy gross profit margin, which averaged around 39% between 2018 and 2022. Additionally, the net profit margin remained strong, averaging above 15% during this period, indicating that the company efficiently converts its revenues into profits. Moreover, STMicroelectronics has shown a significant increase in its EBITDA margin, which surged from 12.9% in 2020 to an impressive 27.5% in 2022. This considerable growth in EBITDA margin signifies the company's enhanced operational efficiency and cost management.
The outlook remains promising, with a projected 5-year CAGR on EBITDA of 10% from 2022 to 2027. This forward-looking trend indicates that STMicroelectronics is well-positioned to sustain and potentially accelerate its growth, reflecting a strong financial foundation and strategic management.
Optimistic Outlook for STM
STMicroelectronics' significant market share of 2.7% in a substantial $573.44 billion market provides a strong foundation for growth. The company is well-poised to harness a series of robust growth drivers. For instance, the electric vehicle market is projected to maintain an impressive Compound Annual Growth Rate (CAGR) of 8% between 2022 and 2027. Simultaneously, vehicle digitalization is expected to experience a remarkable CAGR of 15%, reflecting the increasing integration of digital technologies in vehicles. Furthermore, STMicroelectronics' strong financial metrics, as indicated by key performance indicators, underscore its financial stability and robust profitability. This, along with its brand diversity, provides a solid platform for the company to capitalize on these growth opportunities.
Financial metrics
Liquidity
1. Current Ratio: The current ratio is a measure of a company's short-term liquidity, indicating its ability to cover its short-term obligations using its current assets. An ideal current ratio is typically considered to be around 2:1, which means that STM has more than enough current assets (such as cash, accounts receivable) to cover its current liabilities (such as accounts payable and short-term debt). A current ratio of 2.1 suggests that STM has a comfortable cushion of short-term assets to meet its short-term obligations, which is generally a positive sign.
2. Quick Ratio: The quick ratio, also known as the acid-test ratio, is a more stringent measure of liquidity. It excludes inventory from current assets since inventory can sometimes be less liquid. A quick ratio of 1.55 means that, even without considering inventory, STM has sufficient liquid assets to cover its short-term liabilities. This is generally a positive sign, indicating a strong ability to meet immediate obligations.
3. Cash Ratio: The cash ratio is the strictest measure of liquidity as it considers only cash and cash equivalents. A cash ratio of 0.7 means that STM holds cash and near-cash assets equal to 70% of its current liabilities. While this ratio is lower than the current and quick ratios, it's still a reasonable sign of liquidity. It suggests that the company has a significant amount of cash on hand relative to its short-term obligations.
4. Short-Term Coverage Ratio: The short-term coverage ratio assesses a company's ability to meet its short-term debt obligations, usually within a year. A ratio of 6.3 indicates that STM has a substantial multiple of its short-term debt covered by its current assets. This is a strong indicator that STM is well-prepared to meet its short-term debt obligations, which is a positive sign.
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Profitability
1. Goss Profit Margin (45%): The gross profit margin measures the percentage of revenue retained as profit after deducting the cost of goods sold (COGS). A gross profit margin of 45% indicates that for every dollar in sales, STM retains $0.45 as gross profit. This is generally considered a strong gross profit margin, suggesting efficient cost management and the ability to maintain a substantial portion of revenue as profit.
2. Net Profit Margin (27%): The net profit margin measures the percentage of revenue that remains as profit after all expenses, including operating expenses, interest, and taxes, are accounted for. An net profit margin of 27% suggests that for every dollar in sales, STM retains $0.27 as net profit. This is a favorable sign, indicating efficient cost control and profitability in the company's operations.
3. Return on Assets (21%): Return on assets (ROA) measures how efficiently a company utilizes its assets to generate profit. An ROA of 21% suggests that STM generates a 21% return on every dollar of assets employed. This is a positive indicator, signifying effective asset utilization and a strong ability to generate earnings from its asset base.
4. Return on Equity (32%): Return on equity (ROE) evaluates a company's ability to generate returns for its shareholders based on the equity invested. An ROE of 32% implies that STM is delivering a 32% return on each dollar of shareholders' equity. This is a good sign, indicating that the company efficiently uses shareholder investments to create profit.
5. EBIT per Revenue (28%): Earnings Before Interest and Taxes (EBIT) per revenue assesses the company's ability to generate operating earnings relative to its total revenue. An EBIT margin of 28% means that STM retains 28% of its revenue as operating profit before interest and taxes. This is apositive indicator, reflecting efficient operations and strong profitability.
6. EBITDA Margin: The EBITDA margin evaluates a company's operating profitability before accounting for interest, taxes, depreciation, and amortization. An EBITDA margin of 27.5% is a strong indicator, showcasing effective cost management and operational efficiency.
Financial Leverage
1. Debt Ratio (12%): The debt ratio, also known as the debt-to-assets ratio, measures the percentage of a company's total assets financed by debt. A debt ratio of 12% suggests that only 12% of STM's total assets are funded through debt. This is generally considered a good sign, indicating that the company relies less on debt to support its assets, which can lead to lower financial risk.
2. Debt Equity Ratio (19%): The debt equity ratio, also known as the debt-to-equity ratio, assesses the proportion of a company's financing that comes from debt relative to equity. A debt equity ratio of 19% means that 19% of STM's financing comes from debt, while the remaining 81% comes from equity. This indicates that STM has a higher equity stake in its capital structure, which is generally considered a good sign as it signifies lower financial leverage and reduced risk.
3. Total Debt to Capitalization (16%): This ratio measures the portion of a company's total capitalization (the sum of debt and equity) represented by total debt. A total debt to capitalization ratio of 16% indicates that 16% of STM's total capitalization is in the form of debt. A lower ratio is typically considered a good sign, as it implies a lower reliance on debt for capital.
4. Interest Coverage Ratio (119%): The interest coverage ratio evaluates a company's ability to cover its interest expenses with its earnings. An interest coverage ratio of 119% indicates that STM's earnings are 119% more than sufficient to cover its interest expenses. This is a strong indicator, suggesting that the company has a comfortable buffer to meet its interest obligations.
5. Cash Flow to Debt Ratio (217%): The cash flow to debt ratio assesses a company's ability to generate cash flow sufficient to service its debt. A ratio of 217% implies that STM generates cash flow more than twice the amount needed to cover its debt obligations. This is a very positive sign, indicating robust financial health and the capacity to easily manage debt.
Valuation
Several valuation methodologies were utilized in deriving a target price for STMicroelectrics N.V. (STM), we used an intrinsic and a relative valuation approach. The intrinsic one relies upon the discount cash flow model (DCF) utilizing the free cash flow to firm model (FCFF). We estimated the terminal value of the company through 2 different methodologies: Exit Multiple Method and Perpetuity Growth Method.
DCF Model
A Discounted Cash Flow Analysis was used to estimate the intrinsic Value of STMicroelectrics due to the predictability of cash flows in relation to growth and profitability. The base case for this model was formulated using guidance from historical performance, industry outlook, an assessment of ST’s competitive positioning, and company guidance on revenue, and earnings growth. This model is driven by Unlevered Free Cash Flow as this represents cash that is available for debt and equity holders and is calculated as EBIT minus taxes, plus D&A, minus CaPEx and change in Net Working Capital. The model is forecasted five years, mainly because the industry of semiconductors is considered to be in its mature phase and longer horizon would require more stringent and comprehensive historical data.
We estimated the increase in company’s revenue by weighting its YoY growth upon its 3 main product groups, namely: Automotive and Discrete Group, Analog, MEMS and Sensors Group, Microcontrollers and Digital ICs Group. At the same time, we estimated the growth of the 3 products groups making inference on their drivers (discussed in Drivers). Furthermore, given the maturity of the company and the historical stability of its COGS we assumed that product COGS margins will remain steady at 58%. It’s also important to note that for the competition of the terminal value under the perpetuity growth method we assumed a terminal growth rate of 2%.
The DCF is most sensitive to the following factors, the derivations of which are explained below:
Weighted Average Cost of Capital (WACC)
As a common discount rate, we used the WACC as this metric represent best the equity and debt holder’s interest. To calculate Cost of Equity, we utilized the traditional CAPM relying on external analysis for market risk premium and beta. A WACC of 10.2% suggests that STMicroelectronics (STM) faces a moderate cost of financing its operations and investments. This is the return that STM must provide to its investors and lenders to compensate for the use of their capital. It is neither exceptionally high, indicating excessive risk, nor exceptionally low, indicating a very safe investment. However, ST’s WACC is below industry average of 12.5%, indicating that investors are willing to demand for a lower retrun in exchange of lower stock’s volatility.
Terminal Value
Using the Multiples Method and the Perpetuity Growth Method, we have calculated a terminal value that exceeds the Enterprise value. When the terminal value surpasses the enterprise value for a particular year, it indicates the expectation that the company will continue to expand and generate cash flows beyond the projected period. Furthermore, it implies that the value of those future cash flows outweighs the value of the company's current operations. This can be a positive sign for investors, as it suggests that the company has strong growth potential and may be undervalued.
However it’s important to conduct sensitivity analysis to test the robustness of the model and the impact of changing in assumptions. The implied EV/EBITDA multiple was inferred considering the 10 biggest semiconductor companies multiple, the semiconductor industry multiple and the broad electronics industry, providing an EV/EBITDA 13.9x
Sensitivity Analysis
As we never rely on one number due to the fact that with DCF modelling lots of assumptions are involved, we conducted sensitivity analysis to get a range of potential values. We performed the sensitivity analysis given changes in the exit multiple (EV/EBITDA) for the Multiple Method and last year future cash flow growth rate for the Perpetuity Growth Method given changes in the WACC.
Relative Valuation
For our comparable universe we tried to select companies who are similar to STMicroelectronics in terms of profitability, geographic area, size, product offerings, customer base and capital structure or who compete with ST in some segment. Our universe of trading comps consists of Taiwan Semiconductor Manufacturing Co. (TSM), Intel (INTC), Qualcomm (QCOM), Broadcom (AVGO), Nvidia (NVDA), Applied Materials (AMAT). We concentrate us on the EV/EBITDA multiple, EV/REVENUE multiple and P/E multiple using consensus earnings estimates to calculate a potential share price range for the years of 2022 and 2023. An EV/EBITDA multiple range from 11.8x to 11.1x from its mean to median, P/E multiple from 3.8x to 4.5x and EV/EBITDA from 0x to 13.5x in 2023 we derived a relative median value of $81.10, $20.70 and $78.14 respectively per share. Based on our relative valuation we can determine a median weighted share price of $59.98 with a 38% premium from current.
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