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  • STMicroelectronics N.V. Stock: 34% Yield Potential with Semiconductor Shortage and a Diversified Business Model

STMicroelectronics N.V. Stock: 34% Yield Potential with Semiconductor Shortage and a Diversified Business Model

Company Name: STMicroelectronics
Entry Price: €29,8/$35,3
Target Price: €40.00/$47.00
Projected Yield: 34,2%/33,1%
Time Line: 3 to 6 months
Risk: High
Position Size: 2%

About STMicroelectronics

STMicroelectronics NV is one of the largest EU manufacturers of semiconductor integrated circuits, discrete devices, and microelectronic components.

The company works in the following domains: Automotive and Discrete (ADG), analog devices, MEMS, and sensors (AMS), and micro controllers and digital IC's (MDG).

What's the Idea?

Capitalize on a stock that may rise with higher semiconductor demand in the automotive industry due to the current shortage.

Buy STMicroelectronics Shares >>

Why trade STMicroelectronics N.V.?

Reason 1: Semiconductor Shortage in Automotive Market

Previously, we talked about the semiconductor shortage in the automotive market, from which NXP Semiconductors (NXPI.US) might benefit. STMicroelectronics also has a potential advantage here, as this company also manufactures semiconductors for the automotive sector.

The automotive market is undergoing dramatic changes due to the rising popularity of electric cars and the active implementation of various technological solutions. These changes are mainly driven by China, where the government is putting a lot of effort into CO2 emission reduction and raising the electric vehicle popularity. These government initiatives led to a large demand for electric cars in China, and many new manufacturers emerged.

While China is on the forefront, the rest of the world is not that much behind. By 2025, the electric car share is expected at 17% of the total number of cars across the globe.

In the meantime, many automotive companies are implementing various technological solutions, including driver assistance systems (ADAS) and autopilot, which are the most popular. This is also a great thing for STMicroelectronics, as a third of the company's earnings comes from automotive industry solutions (ADG). The company provides a wide range of technology products, which includes driver assistance systems and autopilot, solutions for collecting and analyzing data on the internal vehicle systems, infotainment solutions, communication systems, etc. Among the largest customers in this segment one can name Tesla and Continental. In 2019, STMicroelectronics' share of the global semiconductor market for the automotive sector was at 7.60%, which is the fifth in the world, Statista reports.

Meanwhile, IHS Markit confirms there is a shortage in the automotive semiconductor market, which may affect many companies working in this industry. Ford, Toyota, Fiat Chrysler, and Nissan already cut their production due to this shortage, with Tesla and Volkswagen being the next. All this happened mostly because the demand had risen drastically, and this is very much in favor of STMicroelectronics, which may reap a good amount of earnings through this in the midterm.

Reason 2: Sustainable Diversified Business

An additional advantage of STMicroelectronics is its diversified business organization. The company provides a wide range of products and solutions in various sectors and segments, such as communication equipment, IoT solutions, consumer electronics, industrial products, data center solutions, etc.

In 2020, the earnings got distributed quite evenly, with 32% accounting for automotive, 38% for analog devices, MEMS, and sensors, and 49%, for micro controllers and digital IC's.

49% of total earnings come from the top 10 original equipment manufacturers (OEM's), while the rest 51% accounts for all other OEM's and distributors. STMicroelectronics customer base consists of over 100K companies, with Apple, Intel-Mobileye, Bosch, Samsung, HP, Huawei and Tesla being among them.Such diversification may well ensure income sustainability against any possible volatility in one of the sectors.

Reason 3: Partnership with Intel

STMicroelectronics products are popular with major market players. Thus, in early March, Intel introduced RealSense LiDAR L515 camera, which uses STMicroelectronics micro mirrors. These devices are unrivaled in accuracy and are the world's smallest high-definition LiDAR cameras that could be used in various industries, such as robotics, logistics, scanning, and other computer vision sectors.

This partnership is not about significant growth boosts, but may serve as a great base for similar future agreements.

Reason 4: Financial Performance

Despite the pandemic, STMicroelectronics's earnings rose by 6.90% in 2020. In Q2, the largest earnings and margin losses were in the ADG and AMS segments; however, these numbers recovered in Q3 and Q4. As a result, the earnings in 2020 reached $10.20B, the operating margin increased from 12.60% to 12.90%, and the EBITDA margin was at 22% versus 21.50%. Meanwhile, the annual diluted EPS increased to $1.20 from $1.14 a year before. The company has a low debt burden, the amount of debt being at $2.60B, while the amount of liquid funds is at $3.70B. The cash flow is stable, with the Net CFO being at $2.10B last year, while the FCF reached $627M.

The ratios are currently as follows: EV/S at 2.96x, EV/EBITDA at 13x, PE at 29x, and Forward PE, at 18x.

These data show that STMicroelectronics is trading a bit low compared to the major competition.

A few major banks and investment companies raised the target price for STMicroelectronics stock as follows: JPMorgan Chase & Co., to €35, Deutsche Bank Aktiengesellschaft, to €40, Kepler Capital Markets, to €40, Berenberg Bank to €39, and Credit Suisse Group, to €39.

Currently, the stock is trading at €29.8.

How to Use the Idea

  1. Buy STMicroelectronics NV stock at €29.8 ($35.3).
  2. Allocate no more than 2% of your portfolio for the transaction. To build a balanced portfolio, you can use the recommendations by our analysts. 
  3. Sell the stock when the price reaches € 40.00 ($47.00).

How to Buy STMicroelectronics Shares?

If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.

After opening an account, you can buy shares in either of the following ways:

Freedom24 Web Platform: In the Web Terminal section, type STM.EU/STM.US (STMicroelectronics ticker in the NASDAQ) in the search box, and select STMicroelectronics in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.

Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type STM.EU/STM.US (STMicroelectronics ticker in the NASDAQ) and select STMicroelectronics in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.

Buy STMicroelectronics Shares >>

*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Cyprus Ltd or its affiliates and/or subsidiaries (collectively Freedom Finance). Freedom Finance do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.