STMicroelectronics N.V.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

STM is a global semiconductor leader with state-of-the-art facilities and diversified offerings, but the industry’s cyclicality and intense competition present significant challenges.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

STM has recently announced a new share repurchase program on June 21, 2024, showcasing management’s confidence in the company’s financial health and future prospects.

Business Overview

STMicroelectronics (STM) is a global semiconductor company with a diverse product portfolio spanning microcontrollers, sensors, power management ICs, and other specialty semiconductor devices. Its business model is characterized by its presence in the integrated device manufacturing (IDM) market.

STM’s position in the semiconductor market is strengthened by their emphasis on end to end production: From the design phase, to manufacturing and then to sales.

  • Revenue Distribution: STM’s revenue is spread across various end markets.
  • Automotive: A significant portion of STM’s revenue is derived from the automotive sector, where the company’s solutions are used in car electrification, Advanced driver-assistance systems (ADAS), and automotive safety systems. They are transitioning into electric vehicles with Silicon Carbide technologies. * Automotive accounts for approximately 30% of revenue.
  • Industrial: STM provides a range of solutions for industrial automation, power management, and energy efficiency applications.
    • Industrial and general market segment accounts for approximately 28% of total revenues.
  • Personal Electronics: Another key market for STM, with its components used in smartphones, wearables, and other consumer electronic devices.
    • Personal electronics account for approximately 33% of revenues.
  • Communication Equipment: STM has a presence in the Communication sector, providing embedded connectivity and advanced power supplies solutions.
    • Communication Equipment accounts for about 9% of revenue.
  • Industry Trends:
    • The semiconductor industry is currently highly competitive.
    • Demand is currently strong in several industries, and the trends of innovation and advancement in multiple different technologies are driving demand. The major industries contributing to revenue growth are: automotive and energy efficiency markets, and consumer and communication devices.
    • The industry is cyclical, influenced by economic changes, and it is known for being volatile.
    • Global supply chain dynamics are ever evolving which affects the prices and availability of different components.

The market for silicon carbide, which is used in electric vehicle power modules and is a key component for STMicroelectronics, is expected to be the fastest-growing part of the power semiconductor market for the next several years. This creates significant potential for growth within STMicroelectronics.

  • The semiconductor industry is marked by continuous innovation and product development, driving new opportunities and competitive threats.

  • Margins: Margins are influenced by production efficiency, pricing competition, and the mix of products that are sold. STM, along with other semiconductor companies, is working to increase the margins on its existing products and to push into newer and more advanced higher-margin sectors.

  • Competitive Landscape:
    • The semiconductor industry is highly competitive, with established giants and emerging players.
    • Competitors include firms with specialized capabilities in different segments, making differentiation challenging.
    • Competition comes from well-established players like TSMC, Intel, Samsung and Analog Devices, as well as newer players such as Nexperia and Infineon.
    • Many companies in the industry are attempting to expand and grow into the same areas in which other companies are competing.
  • What Makes STM Different:
  • STM maintains its position as an Integrated Device Manufacturer (IDM).

This vertical integration of the supply chain enables STM to control operations and produce high-quality products.

  • STM has a broad technology portfolio, enabling it to address many different needs of different sectors.
  • The company has a good presence in emerging technologies such as silicon carbide and has multiple facilities around the world.

Financial Analysis

STM has a strong focus on capital investment, especially R&D, to remain competitive and innovative. They also have an expanding capacity, particularly for silicon carbide production. The company’s financials reflect a commitment to growth and market leadership. The following data is all from the most recent quarterly and annual SEC filings.

  • Revenue:
  • For the year ending December 31, 2023, net revenues totaled $16.13 billion, up 7.2% from the previous year. This increase was primarily driven by higher volumes and, to a lesser extent, slightly higher selling prices.
  • For the three months ending December 31, 2023, net revenues were $4.43 billion, a 0.8% increase sequentially, and a 15.6% increase YoY.

  • The market of their products in the Americas experienced large increases in volume, with Europe, Middle East and Africa (EMEA) markets experiencing declines and the Asia Pacific market remaining relatively stable.

  • Operating Profitability:
  • The gross profit margin for 2023 was 47.5%, compared with 42.9% in 2022.
  • The Operating income also increased from $2.47 Billion in 2021 to $4.4 Billion in 2023.

  • Their fourth quarter operating margin was a record 28.8% of revenues, an improvement over a 26.8% margin in 2022. * The increase in profitability comes from better product prices, higher sales volumes, and optimized manufacturing.

  • Cash Flow:
    • Net cash from operating activities was $5.41 billion in 2023, a massive increase from $4.53 Billion in 2022.
    • Free cash flow in 2023 was at $3.1 billion, compared with $2.62 billion in 2022, this improvement was primarily driven by growth in profitability and reduced capital expenditures.
  • Balance Sheet:
    • As of December 31, 2023, total assets were $19.0 billion, compared to $16.9 billion at the end of 2022.
    • The company’s cash position stood at $3.9 billion, and total debt was at approximately $2.8 billion.
    • This shows a strong and healthy liquidity position that gives the company the ability to continue investing and take advantage of new opportunities.
  • Their shareholders equity increased to $12.7 billion by year-end 2023.

The company maintains a relatively good Debt to Equity ratio at less than 1:1.

  • Debt:
    • Short term debt is minimal.
    • Long term debt has a maturity up to 2028 with a coupon of 3.5%.
  • R&D Investments:
  • Research and Development expenses totaled $2.4 billion. The R&D spend primarily focuses on innovating new technologies for power, microcontrollers, and new sensors.
  • The ability to continually innovate will help the company remain competitive.

Moat Assessment

Given the information above, STM’s moat is assessed as 2 out of 5. Here’s why:

  • Strengths (Sources of a Narrow Moat):
    • Technological Expertise: STM’s strengths lie in its technical ability and experience with semiconductor manufacturing. They are known for their capabilities in silicon carbide and MEMS devices. They continually improve and innovate, which can give them an edge on their competitors.
    • Economies of Scale in Manufacturing: As an IDM with numerous manufacturing facilities across the world, they have a good grip on the supply chain.
    • Switching Costs: As automotive and industrial customers have specific requirements, there are switching costs that will keep them locked in to using ST’s products for the long term.
    • Customer Relationships: ST has also maintained strong customer relationships by offering solutions specific to their needs.
  • Weaknesses:
    • Intense Competition: STM is present in a highly competitive industry with multiple key players vying for market share, leading to price pressures and reduced profitability.
    • Lack of a Proprietary Moat: Despite its strengths, STM doesn’t have the intangible moats that companies with a wide moat possess, making its competitive position vulnerable. There are several new entrants in their market who are trying to provide alternative solutions that could put pressure on margins.
    • Cyclicality: The semiconductor industry is highly cyclical. So, any economic downturn may impact the financial performance of the company.
    • Limited Pricing Power: Due to competitive nature of the industry and commoditization of some of its products, ST does not always have full pricing power over their customers.

Risks to the Moat and Business Resilience

  • Technological Disruption: The semiconductor industry is susceptible to rapid technological change, which could quickly render STM’s existing technologies obsolete. Companies must spend a lot on R&D to stay competitive.
  • Customer Concentration: Losing a major customer or failing to adapt their specific demands could affect the company negatively.
  • Global Supply Chain Issues: As seen during the recent pandemic and geopolitical uncertainties, supply chain issues can lead to production bottlenecks, and also increase costs, which can impact the profitability of the company and could create difficulties for obtaining the materials that they need to produce their components.
  • Increased Competition: An increasing number of competitors are trying to enter the market, and they are increasing their investments as well. This increase in competition from new entrants could dilute STM’s market power and increase pressure on the company to maintain high-quality products at low costs.
  • Economic Slowdown: Since semiconductor demand is tied to the consumer and overall economic activity, any slowdown in the global economy may have an affect on demand for ST products, thereby hurting revenue.
  • Geopolitical Risks: Since many of STM’s production is internationally located, any major geopolitical risks, including trade wars, may reduce or harm the company’s supply chain.

Resilience

  • Diversified Product Portfolio: With exposure to multiple sectors and different products.
  • Strong focus on new technologies: Focusing on growing markets such as the automotive market in Europe and the US.
  • Strong Customer Base: They have strong long term relationships with key customers.
  • Vertical Integration: With a high vertical integration, the company is less dependent on outside companies.
  • High investments in R&D: They consistently invest to remain relevant and innovative.
  • Strong Balance Sheet: High cash reserves and adequate debt levels allow a substantial degree of flexibility in uncertain times.

Understandability Rating

The understandability of STM’s business is assessed as a 3 out of 5.

  • Reasoning:
    • The core business of designing, manufacturing, and selling semiconductor devices is moderately complex but also easier than, for instance, complex pharmaceutical companies. Understanding specific technologies, however, requires technical knowledge.
    • Understanding how global macroeconomic trends and the semiconductor industry’s cyclicality can affect the financials is an added layer of complexity.
  • The various financial metrics including NOPLAT and Free Cash Flow can make this analysis slightly difficult for newcomers to investing.

Balance Sheet Health Rating

STM’s balance sheet health is rated as a 4 out of 5.

  • Reasoning:
    • Low Leverage: The debt-to-equity ratio is low, indicating financial stability.
    • Strong Cash Position: A significant amount of cash and liquid assets provide flexibility for investments and operational changes.
    • Solid Asset Base: A combination of tangible and intangible assets.
    • R&D and Capital Investments: They have made adequate investments in R&D to fuel future growth.
    • Good Share Buyback Program: A consistent share buyback program signals that the company values the share price.
  • Potential Weaknesses:
  • High Competition: Constant investments and innovation are a must in this market to remain afloat.
  • Cyclicality: Although a company has a strong balance sheet, the cyclicality of the industry could still make their prospects highly volatile. * A focus on the short-term instead of long term will negatively impact the company’s stock price.

Conclusion

STMicroelectronics is a leading semiconductor company with a diversified product portfolio. Their focus on vertical integration is a competitive advantage, but intense competition and volatile cycles in the semiconductor industry are things that require careful management. The company’s balance sheet is healthy, but its valuation is dependent on future growth and their ability to execute their strategy in the coming years.