The semiconductor industry has gotten lots of attention over the last couple of years. Economists have blamed chip shortages for stymying the growth of every other industry from automobiles to electronics, medical devices, appliances and telecommunications. They may sound like a broken record, but unfortunately, it's the truth. Semiconductor shortages have eased somewhat, but delays continue.
That leaves a significant upside potential for growth in semiconductor stocks, underpinning my bullish position in STMicroelectronics NV (STM, Financial).
STMicroelectronics was upward-bound until the pandemic upset the economy. The troubles eased a bit between October 2021 and February 2022, but this small-cap's shares barely changed in price. They are down 4.11% over the past 12 months; 2022 opened with shares topping $50 before declining to around the $37 mark as of the writing of this article.
High inflation and Russia’s invasion of Ukraine have caused STMicroelectronics to go on a rollercoaster in price. However, I believe in the long-term value of this stock; here's why.
About the company
Based in Switzerland, STMicroelectronics designs, develops, manufactures and markets a range of semiconductor products, including commodity components and integrated circuits (ASICs) for analog, digital and mixed-signal applications.
The operating segments are the Automotive and Discrete Group (ADG), the Analog, MEMS and Sensors Group (AMS) and the Microcontrollers and Digital ICs Group (MDG). ADG produces automotive integrated circuits (ICs) and discrete and power transistor products. AMS makes low-power analog ICs for all markets and smart power products. The AMS segment comprises general purpose and secure microcontrollers as well as electrically erasable programmable read-only memory.
STMicroelectronics has also been a leading developer and supplier of innovative microcontrollers for self-driving cars.
Overlooked and undervalued
STMicroelectronics may be overlooked because of its small size with a market cap of only $34.87 billion, but it is profitable. Revenue is growing, and the company is financially strong and has momentum. The stock has a GF Score of 94 out of 100, driven by a financial strength rating of 9 out of 10 and profitability rating of 8 out of 10.
My average price target for this stock is $63 over the next year. That represents a 70% increase from the current share price. Soon, I expect shares to rebound into the mid $40s. This may seem overly optimistic at first glance, but Wall Street analysts are heavily bullish on this stock, setting an average price target of $60.38.
Hedge funds are also buying shares. Institutions own a mere 2.3% of the shares, though that is a higher percentage than any time over the last two years. Below is a chart showing the volume of buys and sells of this stock from GuruFocus Premium gurus in recent quarters:
Among the other positives, Wall Street analysts rate the semiconductor industry overall as a buy to strong buy.
STMicroelectronics recently announced the repurchase of nearly 300,000 shares for a cost of $13.1 million. Last month, it got a new $665.16 million loan from the European Investment Bank to further research and develop new technologies.
In January, the company reported that its fourth-quarter GAAP earnings per share of 82 cents beat estimates, as did revenue of $3.56 billion, which came in 11% higher year-over-year. The gross margin was a hefty 45.2% and the operating margin was about 25%. Revenue for full-year 2021 was $12.7 billion. I am hoping revenue to top $15 billion this year and $16 billion in 2023, which is slightly more bullish than average Wall Street estimates.
The forward price-earnings ratio is a low 11.46, and there is negligible short interest on the stock.
The downside
There are are two caveats for investors to consider. First, the dividend of 6 cents yields 0.54%, which is lower than the rest of the technology sector's average of 0.73%. It recently made its first increase in two years. Second, GuruFocus detects one severe warning sign with STMicroelectronics that investors ought to investigate before buying: assets growing faster than revenue.
Takeaway
Looking forward, the global semiconductor chip industry is set to grow by $600 billion in 2022 according to Deloitte. It is a minor industry, but a handful of producers dominate it in a few countries. These products are key to economic growth and national defense.
Deloitte estimates the chip shortage cost companies more than $500 billion in revenue misses. The auto industry lost sales of over $210 billion in 2021. Unless there is a worldwide economic meltdown, sales growth in the industry will likely average about 10%. Their biggest challenge is talent shortages.
In my opinion, STMicroelectronics is one of the best value opportunities in the industry. Six years ago, shares sold in the single digits. They are up 160% over the past five years. As of last week, the company's 50-day moving average price was $42.81. With a Beta of 1.48, volatility is greater than the market, making some investors skittish.
STMicroelectronics is not a power player in the industry, but it has steady growth and profits. European governments back the company in some part, limiting any buyout offers. Demand for its products by customers like Tesla (TSLA, Financial) and Apple (AAPL, Financial) make this stock safer than Mr. Market is making it out to be, in my opinion.
