STMicro Should Overcome Near-Term Weakness and Can Drive Ahead in Automotive Semis 

Strategist

Brian Colello

STMicroelectronics is one of Europe's largest chipmakers and holds one of the broadest product portfolios in the industry. The company has made structural improvements to its product mix and gross margin profile, which has allowed it to carve out a narrow economic moat. We think ST has some promising growth opportunities on the horizon in microcontrollers and automotive products, including silicon carbide-based semiconductors.

ST didn’t always have the best track record, regularly failing to earn robust profitability a decade ago due to investments in money-losing digital chip businesses and share loss in other chip products, among other stumbling blocks. It has turned around nicely as it exited these businesses and reduced its investments in various digital chips. Nonetheless, it is still in some highly competitive segments of the chip industry, such as commoditylike discrete chips that carry lower margins than analog chips and microcontrollers from U.S.-based peers. We anticipate strong competition from Chinese firms in these areas in the years ahead but think ST’s reliability will still give it a leg up on these upstarts.

Still, ST’s leading technologies and strong position in the automotive market are reasons to be optimistic about the future, with especially promising opportunities in silicon carbide-based power products. The automotive industry is focused on safer, greener, smarter cars, which is leading to increased electronic content per vehicle. Broad-based chipmakers like ST stand to profit from greater demand for advanced infotainment systems, battery management solutions, and sensors associated with new safety features like blind-spot detection. Broad-based microcontroller sales also appear to be a nice growth avenue.

We anticipate decent growth and profitability improvement out of ST. However, we see wider moats and even more attractive product mixes and margin profiles across several pure-play U.S.-based analog chipmakers we cover.

Business Strategy & Outlook

We assign STMicroelectronics a narrow moat rating, consistent with other broad-based analog, microcontroller, and power semiconductor firms, thanks to intangible assets stemming from the firm's design expertise, as well as customer switching costs as STMicroelectronics' products are rarely ripped out once designed into a given electronics device, particularly in automotive, industrial and Internet of Things (internet-connected smart devices) applications.

STMicroelectronics is one of the largest chipmakers in Europe and a key chip supplier to the industrial and automotive end markets. The firm has an especially diversified product portfolio, from analog chips (used to process real-world signals) to microcontrollers (microcontroller units, used for simple processing in a massive range of end uses) to power semiconductors (used to switch and regulate electric voltage) to sensors (micro-electromechanical systems and digital chips used to detect objects, rotation, and so on).

The majority of STMicroelectronics' revenue comes from segments that, in our opinion, would warrant a narrow moat rating in isolation—mainly analog, digital, and automotive chips. The firm's discrete power chip business might be moaty and is potentially developing design expertise in silicon-carbide based semis, but we think the moat case is less clear cut and we would rate this business as no-moat in isolation. STMicroelectronics is a leader in MEMS and digital chips and sensors, but we consider these remaining businesses to be non-moaty given their exposure to the smartphone industry where life cycles are brief and benefits from customer switching costs are far harder to obtain.

We believe that leading MCU and analog chipmakers benefit from favorable characteristics that lend themselves to economic moats. Moats for chipmakers with analog and MCU expertise tend to come from intangible assets associated with the strength of proprietary chip designs as well as switching costs that make it difficult to swap out analog chips for competing offerings once they are designed into a given electronic device. We believe analog engineering talent is difficult to come by, as greater emphasis is placed on digital chip improvements, and it often takes years to train up-and-coming analog engineers in the intricacies of chip designs. Thus, it is extremely difficult for startups to replicate the many years of analog expertise held by incumbents. Leading analog chipmakers also face stringent quality requirements in some end markets, such as the automotive industry, for example, where defects can only be tolerated as low as one part per million. Although the analog chip market is quite fragmented, it would be difficult for any startup to achieve this level of quality while still being to satisfy high-volume production. Furthermore, analog chips tend to make up only a small portion of a product's bill of materials, so purchasing decisions tend to be based on performance rather than price, helping STMicroelectronics and its peers retain pricing power. Automotive, industrial, and communications infrastructure customers, in particular, are unlikely to choose an inferior analog chip or MCU in order to save pennies on the cost of a piece of equipment worth tens of thousands of dollars. 

Similarly, engineers are loath to swap out an analog or MCU from an existing design (again, only to save a few pennies on cost) because of the onerous redesign and retesting costs associated with the switch. With MCUs in particular, customers also become accustomed to the software and development tools used to test and design a given product. Switching to a competing MCU may involve a bit of a learning curve in the design process. One can imagine the frustration and possible reputational damage to a product if a perfectly functioning electric toothbrush or thermostat were to fail because of an unforeseen change in how the MCU or analog chip interacts with the rest of the circuit board. Again, such damages would be amplified in far more expensive equipment like cars, planes, satellites, and so on 

STMicroelectronics and its chipmaking peers tend to profit from these high switching costs by having lower ongoing research and development and capital expenditure investments than digital chipmakers, which helps to contribute to healthy returns on capital for shareholders. In particular, buyers of analog semis typically don't demand smaller chips packed with more transistors, but rather, reliable products that deliver the desired accuracy and precision in power management or signal processing. Shrinking the chip might not necessarily enhance accuracy (and might even serve to reduce it), so analog chips tend to be made with lagging edge manufacturing techniques.

Some of STMicro's peers take this benefit one step further by concentrating on end markets where product lives are measured in decades, as opposed to the increasingly short life cycles associated with consumer devices like PCs or handsets. STMicroelectronics has a decent amount of exposure in consumer devices, which is part of the reason why the firm's gross margins hover in the high 30%-40% range, rather than the 60%-plus range seen by firms like Texas Instruments or Analog Devices. Similarly, we consider the firm's products sold primarily into these markets—MEMS and digital—to be nonmoaty, even though STMicroelectronics is a leader in this space. All else equal, we are less confident in outsize economic profits from chipmakers that serve the handset and PC industries, given the shorter product life cycles, intense competition, and customer concentration as a handful of tech titans exert tremendous buying power. Yet STMicroelectronics has enough exposure to more profitable industries, like automotive and industrial, to warrant a narrow moat rating.

In silicon-based discrete power semiconductors, STMicroelectronics competes in a fragmented market where moaty firms are able to carve out a cost advantage. We view these types of chips as relatively commoditized in nature; certainly, some firms have design expertise and reputational advantages over others, but we're not convinced that any firm has sufficient intangible assets in the form of design expertise to guarantee excess returns on capital for a decade or more. However, STMicro's rivals like Infineon and Onsemi, both of which have greater overall market share than STMicro, have sufficient economies of scale advantage to warrant narrow moat ratings in power semis based on cost advantage. Given the low teens operating margins earned by STMicro's auto and discrete segment (at best), and our estimates that automotive operating margins exceed discrete power operating margins, we don't have clear-cut evidence or sufficient confidence that STMicroelectronics benefits from a cost advantage or unique design expertise in its power products today.

That said, we see signs that STMicroelectronics might be starting to benefit from moaty characteristics in certain power semis today, namely silicon carbide-based power semis. STMicroelectronics is an early leader in SiC expertise as these chips were used in niche applications. We expect the SiC market to rise exponentially in the next decade or more, given the potential for SiC semis to displace silicon-based semis in electric vehicles and industrial applications as SiC can handle higher voltages and temperatures. We believe the firm is relatively higher up the learning curve than many (but not all) of its SiC peers, and the company has a marquee design win today, selling SiC products into inverters inside of Tesla's Model 3 EVs. STMicroelectronics also captured SiC wafer manufacturing expertise via its acquisition of Norstel. Although some of STMicroelectronics' rivals are focused on SiC products as well, we think STMicroelectronics has some SiC design expertise that will be hard for upstarts to replicate. Between these intangible assets and the potential for STMicroelectronics to carve out a cost advantage as it gains scale in SiC semis, we wouldn't rule out STMicroelectronics' power semi business, as a whole, carving out a moat someday.

STMicro's returns on invested capital in prior years have been below the company's weighted average cost of capital, mainly because the firm still competed in less profitable (if not money losing) wireless baseband and digital chip business like set-top box processors that were both costly to manufacture and faced cutthroat competition. Going forward, we like STMicroelectronics' greater focus on automotive, analog, and MCU chips in particular, while power semis, especially SiC, might be less commoditylike in nature than the firm's legacy product portfolio.

Narrow

Economic Moat

STMicroelectronics NV ADR RegS

ST Ericsson was a multinational manufacturer of wireless products and semiconductors, supplying to mobile device manufacturers. ST-Ericsson was a 50/50 joint venture of Ericsson and STMicroelectronics established on 3 February 2009 and dissolved 2 August 2013. Headquartered in Geneva, Switzerland, it was a fabless company, outsourcing semiconductor manufacturing to foundry companies.

ST Ericsson

STMicroelectronics NV is a global semiconductor company, which engages in the business of designing, developing, manufacturing, and marketing products used in a wide variety of applications for automotive, industrial, personal electronics and communications equipment, computers, and peripherals. It operates through the following segments: Automotive and Discrete Group (ADG), Analog, MEMS, and Sensors Group (AMS), Microcontrollers and Digital ICs Group (MDG), and Others. The ADG segment includes dedicated automotive integrated circuits and discrete and power transistor products. The AMS segment offers analog, smart power, MEMS sensors and actuators, and optical sensing solutions. The MDG segment focuses on general-purpose microcontrollers and microprocessors, connected security products, memories, and RF and communications products. The Others segment is involved in sales assembly services and other revenues. The company was founded in June 1987 and is headquartered in Schiphol, The Netherlands.

Earnings data Q3 2020

Earnings data Q4 2020

Earnings data Q1 2021

Earnings data Q2 2021

Earnings data Q3 2021

Earnings data Q4 2021

Earnings data Q1 2022

Earnings data Q2 2022

Earnings data Q3 2022

Earnings data Q4 2022

Earnings data Q1 2023

Earnings data Q2 2023

Earnings data Q3 2023

Earnings data Q4 2023

Earnings data Q1 2024

Earnings data Q2 2024

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

STMicroelectronics N.V. (STM) CEO Jean-Marc Chery on Q2 2020 Results - Earnings Call Transcript

STMicroelectronics Reports 2020 Second Quarter Financial Results

STMicroelectronics makes acquisitions to further strengthen the wireless connectivity capabilities of STM32 microcontrollers

Co-development of Biometric System-on-Card (BSoC) platform to offer an efficient and competitive solution to card manufacturers for the banking market

STMicroelectronics and Fingerprint Cards Cooperate to Develop and Launch an Advanced Biometric Payment Card Solution

STMicroelectronics Expands STM32WL Wireless Microcontroller Ecosystem with  wM-Bus Stack for Smart Metering from Stackforce

STMicroelectronics Expands STM32WL Wireless Microcontroller Ecosystem with wM-Bus Stack for Smart Metering from Stackforce

STMicroelectronics Extends USB Fast Charging over USB-C® to Embedded Applications with USB-IF-Certified Development Board

STMicroelectronics Announces Status of Common Share Repurchase Program

STMicroelectronics Announces Status  of Common Share Repurchase Program

STMicroelectronics Accelerates Creation of Advanced High-Efficiency

STMicroelectronics Accelerates Creation of Advanced High-Efficiency  Power Solutions with STM32 Digital-Power Ecosystem

STMicroelectronics: Statement from Supervisory Board of STMicroelectronics

STMicroelectronics: STMicroelectronics’ Annual General Meeting 2020

STMicroelectronics Joins the Silicon Catalyst Ecosystem

STMicroelectronics’ Reference Design Enables Compact and Cost-Effective Wearables with Social-Distancing, Contact-Tracing, and Remote Capabilities

Arrow Electronics

Panasonic Holdings Corp

Arrow Electronics, Panasonic Industry, and STMicroelectronics  Join Forces to Deliver IoT Modules for Smart Applications     Low-Power Wireless Multi-Sensor Edge-Intelligence Modules Address Smart Factory, Smart Home and Smart Life Solutions

Arrow Electronics, Panasonic Industry, and STMicroelectronics  Join Forces to Deliver IoT Modules for Smart Applications

STMicroelectronics Joins Zhaga Consortium

STMicroelectronics Publishes its Annual Sustainability Report

It's designing mobile and automotive chips with STMicroelectronics, Nikkei reports.

Huawei reportedly partners with European chipmaker amid US restrictions

STMicroelectronics  Announces Status of Common Share Repurchase Program

It's Not Too Late To Buy STMicroelectronics

Texas Instruments

Chipmakers Texas Instruments and STMicroelectronics posted strong results, paired with optimistic analyses of the sector's prospects amid the COVID-19 crisis.

2 Solid Reports Give Hope to Semiconductor Investors

STMicroelectronics N.V. (STM) CEO Jean-Marc Chery on Q1 2020 Results - Earnings Call Transcript

STMicroelectronics Reports on Supervisory Board Decision  on New Date for 2020 Annual General Meeting of Shareholders  and Revised Dividend Resolution

STMicroelectronics Announces   Status of Common Share Repurchase Program

Sony

Skyworks Solutions

These three companies might not pay the highest yields now, but their stable businesses and low payout ratios indicate that they could pay much higher dividends in the future.

3 Great Income Stocks  that Could Double their Dividends

STMicroelectronics   Announces Status of Common Share Repurchase Program

STMicroelectronics  - Announces Status of Common Share Repurchase Program

News for STMicroelectronics NV ADR RegS Stock (STM)