EUR 850.00 For Business Accounts Only

Morningstar | ST Provides a Bullish Midterm Target of $12 Billion of Revenue; Maintaining $22 FVE

The highlight of STMicroelectronics' 2019 analyst day, in our view, was its introduction of its midterm financial model, which was ahead of our expectations on the top line and consistent with our prior assumptions on the gross margin and operating margin lines. We remain pleased with ST's transformation and focus on higher-margin products in analog, automotive, and microcontrollers. Meanwhile, investments in silicon-carbide based power semis may lead to $1 billion of revenue (as targeted) by 2025 versus $200 million in 2019. ST anticipates that if the macroeconomy and other factors fare well (a big if, in light of heightened U.S.-China trade tensions in the near term), the company might reach this target as a run rate in late 2021 or 2022, all within its existing manufacturing footprint. We maintain our assumptions of ST reaching $12 billion-plus in revenue in 2023, so hitting this target any sooner would be a pleasant surprise to us. We will maintain our fair value estimates of $22 per U.S. ADR and EUR 20 per share. Even with shares up about 8% on the heels of the positive analyst day, we still view shares as undervalued.

ST's midterm financial model calls for $12.0 billion of revenue by 2022, versus revenue of $9.65 billion for 2019 (at the midpoint of guidance). Gross margin is forecast to be 40%-41% in the midterm, consistent with our prior assumptions as we also anticipate gross margin expansion from the 40% STMicroelectronics earned last year and the 38% midpoint of guidance for 2019. Additional operating leverage should help ST reach its midterm target of 17%-19% operating margins as well, compared with our forecast of a 12% margin in 2019 in a down year and 14.5% earned in 2018. We're also encouraged by ST's comments that such operating margin expansion will come from all product groups, as the firm's three main segments (auto and discrete; analog and MEMS; and MCUs and digital) are all expected to expand by a few hundred basis points in the midterm.