STMicroelectronics upgraded at Baird on margin recovery, SiC and product upside

Baird Equity Research upgraded STMicroelectronics (STMPA) to “outperform” and raised its price target to $50 from $23, implying a 52% upside, based on improving gross margins, a rebound in silicon carbide (SiC) revenue, and stronger content in new products. The upgrade anticipates accelerated gross margin recovery by Q3, resolution of fab yield issues, increased 300mm wafer utilization, and lower capital expenditures. Baird projects a revenue bottom in Q1 2025 for industrial and automotive segments, with SiC revenue already rebounding, and set the new target based on a 17x multiple of its preliminary 2027 GAAP EPS estimate of $3.

Analysis

Baird Equity Research's upgrade of STMicroelectronics to “outperform” with a new $50 price target signals a strong conviction in the company's long-term recovery, implying a 52% upside. The valuation is based on a 17x multiple of a preliminary 2027 GAAP EPS estimate of $3, which aligns with the company's five-year average. This bullish thesis is underpinned by an expected acceleration in gross margin recovery starting in Q3, driven by the resolution of fab yield issues and improving utilization from the transition to 300mm wafers, which are targeted to comprise 57% of output by 2027. This strategic shift is also projected to lower capital expenditures to 15% of revenue from 2025-2027, down from 21% over the prior four years. While revenue in the industrial and automotive segments is expected to bottom in Q1 2025, silicon carbide (SiC) revenue is already rebounding, bolstered by a joint venture with Sanan Optoelectronics supplying Chinese EV platforms like BYD and Geely, and a stabilized market share with Tesla in the low 50% range. Despite this long-term optimism, the path involves a significant projected earnings decline in 2025 to $0.80 per share before recovering.

Key Decisions for Investors

• Evaluate STMicroelectronics based on its long-term recovery potential, as the bullish price target is predicated on a 2027 EPS estimate of $3.00, requiring patience through the forecasted 2025 earnings dip.
• Monitor key execution milestones that validate the upgrade thesis, including gross margin recovery beginning in Q3, the ramp of the 300mm wafer production, and revenue contributions from the Silicon Carbide joint venture.
• Despite the positive outlook, consider the noted risks of elevated channel inventories and potential reversals in consumer demand, which could impact the timing of the revenue recovery projected to begin after Q1 2025.