On Friday, Susquehanna maintained a Positive rating on STMicroelectronics (NYSE:STM) shares, but lowered the price target to $33 from $35. The adjustment follows the company's release of in-line financial results alongside disappointing guidance, particularly in the Automotive and Industrial sectors.
STMicroelectronics' forecast for fiscal year 2024 was set at $13.27 billion, which is at the lower end of their previous range. Management anticipates the first quarter will perform significantly below normal seasonality due to a combination of factors including a lower backlog, weaker demand, and fewer days compared to the fourth quarter.
The analyst highlighted that the market had expected only a slight decline for the first quarter, making this substantial revision a difficult starting point for the year 2025. Consequently, the firm has reduced its top line estimate for 2025 by $1.3 billion.
Despite initial hopes for a 2% year-over-year growth in 2025, the new forecast indicates an 8% decline. The third quarter saw weaker Automotive performance than expected, with a noted decrease in backlog. STMicroelectronics also revised its 2024 Silicon Carbide (SiC) guidance to between $1.15 billion and $1.2 billion, down from the previous $1.3 billion, and removed its $500 million growth expectation for 2025.
Despite Industrial performance exceeding expectations, recovery is being impeded by ongoing inventory corrections at original equipment manufacturers (OEMs). The company also acknowledged challenges such as lost market share in China's general-purpose microcontroller unit (MCU) market and continued price pressures.
The Communications and Compute sectors performed below expectations, though customer engagement in these areas remains on track. STMicroelectronics also anticipates mid-single-digit percentage declines in pricing for 2025, a steeper drop than the low-single-digit percentage decline seen in 2024.
Gross margin guidance for the fourth quarter was underwhelming, partly due to unused capacity charges, and the firm expects gross margin pressure to persist into the first quarter. Operating expenses, however, were better managed as the company continued to control discretionary spending.
Moreover, STMicroelectronics announced a new initiative to accelerate wafer fabrication capacity to 300mm silicon and 200mm SiC. While maintaining a $2.5 billion net capital expenditure for 2024, the company plans to reduce capital expenditures over the next three years.
The analyst concluded by expressing difficulty in finding growth areas for 2025 but remains optimistic about the company's long-term strategy, which will be further discussed at their Capital Markets Day on November 20. The opportunities in SiC, Gallium Nitride (GaN), and 32-bit MCU, supported by strong customer relationships with companies like Tesla (NASDAQ:TSLA), Mobileye, Apple (NASDAQ:AAPL), and Starlink, underpin the Positive rating despite the lowered price target.
In other recent news, STMicroelectronics reported a decline in net revenues of 26.6% year-over-year in its Third Quarter 2024 Earnings Call, with the figure standing at $3.25 billion. The gross margin also dipped to 37.8% from 47.6% in the previous year, and net income dropped to $351 million. Amid these developments, the company is undergoing a restructuring plan aimed at saving $800 million by 2027, with a focus on improving 300mm and 200mm silicon capabilities.
In collaboration news, STMicroelectronics has announced a strategic partnership with Qualcomm (NASDAQ:QCOM) for IoT solutions. Despite a challenging market in the automotive sector, the company has seen over 30% year-over-year growth in the microcontroller community during Q3.
However, the company has revised down its silicon carbide revenue expectations for 2024 to between $1.15 billion and $1.2 billion, and for 2025 from $2 billion to $1.8 billion due to market uncertainties. These are some of the recent developments surrounding STMicroelectronics.
InvestingPro Insights
STMicroelectronics' recent financial performance and guidance align with several InvestingPro metrics and tips. The company's market cap stands at $23.8 billion, with a P/E ratio of 11.56, indicating a relatively low valuation compared to its earnings. This could be attractive to value investors, especially considering the stock is trading near its 52-week low, as highlighted by one of the InvestingPro Tips.
The company's revenue for the last twelve months was $15.41 billion, with a revenue growth decline of 11.02% over the same period. This aligns with the analyst's report of disappointing guidance and the InvestingPro Tip that analysts anticipate a sales decline in the current year. Despite these challenges, STMicroelectronics maintains a strong financial position, with InvestingPro Tips noting that it holds more cash than debt on its balance sheet and its liquid assets exceed short-term obligations.
STMicroelectronics has demonstrated commitment to shareholder returns, maintaining dividend payments for 26 consecutive years according to InvestingPro Tips. The current dividend yield is 1.33%, with a notable dividend growth of 50% in the last twelve months. This could be appealing to income-focused investors, even as the company navigates through current market challenges.
For investors seeking a deeper understanding of STMicroelectronics' financial health and future prospects, InvestingPro offers 11 additional tips beyond those mentioned here, providing a comprehensive analysis to inform investment decisions.
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