STMicro Earnings: Silicon Carbide Opportunities Remain Promising; Shares Undervalued

Narrow-moat STMicroelectronics STM reported solid first-quarter results and provided investors with a healthy forecast for the second quarter and all of calendar 2023, as the company remains well positioned to prosper from resilient chip demand in the automotive and industrial end markets. We maintain our $59/EUR 55 fair value estimate and view the company as undervalued. The shares dipped by as much as 9% after the release, which we suspect was a response to lower revenue coming from Apple later in the year, but we view the April 27 selloff as overdone.

Revenue in the March quarter was $4.25 billion, down 4% sequentially but up 20% year over year and above the guidance midpoint of $4.20 billion. Automotive and discrete chip sales were the bright spot, up 44% year over year. We’re particularly encouraged by ST’s prospects in silicon carbide-based semiconductors, as the firm boosted its forecast to $1.2 billion of revenue from this product line from $1.0 billion on the back of robust demand for silicon carbide power semis in electric vehicles. Microcontroller and digital revenue, which is closely tied to industrial sector demand, fell 1% sequentially but was still up 14% year over year. Higher sales levels enabled gross margin to expand 300 basis points year over year to an impressive 49.7%.

For the June quarter, ST expects revenue of $4.28 billion, which would be up 1% sequentially and 11.5% year over year. Gross margin is expected to remain stout at 49%. ST expects revenue in the second half of 2023 to be only 4% higher than the first half, as the company acknowledged that it had a product mix change in Apple’s iPhones that will be a $0.5 billion headwind to revenue. Apple represented 17% of revenue, or $2.7 billion, in 2022. Still, ST forecasts 2023 revenue of $17.4 billion at the midpoint of guidance, which would represent 8% revenue growth.