STMicroelectronics is making the technology that powers electric vehicles, industrial automation, and power management solutions.

As worries of a recession and a slowdown in chip sales mount, semiconductor stocks are getting mighty cheap. STMicroelectronics ( STM 1.07%) is one of those stocks. The often-overlooked Switzerland-based chipmaker is a top tech supplier to the auto industry, as well as a supplier for related tech trends like industrial automation and power management.

Trading for just over 10 times trailing 12-month earnings per share, this stock could be a top way to bet on the gradual electrification and digitization of the auto industry. STMicro is everywhere

A global shortage of chips has sent STMicro’s financials soaring over the last couple of years. After a sleepy period from 2018 through early 2021 due to the U.S.-China trade war and then the pandemic, sales have skyrocketed since. The reason why isn’t hard to understand: STMicro is a top supplier of chips to the auto industry. In Q2 2022, STMicro’s auto sales increased 35% year-over-year to $1.45 billion and represented 38% of total revenue.

Modern vehicles are increasingly adding digital displays and advanced driver assist systems (ADAS), and electric vehicles are also rising as a percentage of vehicles sold. This confluence of factors means more electronic components are needed to manufacture a car than ever before. This digitization and electrification trend will likely continue for many years.

Additionally, STMicro’s products are finding applications in robotics equipment used in factories. Power efficiency is also a top concern in industrial markets — especially with Europe (where the bulk of STMicro’s operations are based) facing an energy crisis due to the war in Ukraine.

STMicro is everywhere, but it has several secular growth trends working in its favor that could keep the business in strong growth mode over the next decade. Through the first half of 2022, revenue increased 23% year-over-year to $7.38 billion. Operating income doubled year-over-year to $1.88 billion, representing a healthy operating profit margin of 25%. The company closed out June 2022 with a solid balance sheet. Cash and short-term investments were $3.44 billion, offset by debt of $2.52 billion. A small chipmaker with bigger ambitions

During an investor event in May 2022, STMicro laid out some ambitious growth plans. The company thinks it will surpass the $20 billion annual revenue mark sometime between 2025 and 2027 (revenue is expected to be $15.9 billion to $16.2 billion in 2022). More importantly, though, it sees operating profit margins of 30% or greater (compared to the low- to mid-20% operating margin over the last year).

If STMicro can pull it off, that would be a significant achievement for shareholders. Not only would this be a growth company, but profitability would increase faster thanks to rising margins on products sold. STMicro says it can accomplish its ambitions through a combination of higher sales of new technologies (especially in automotive and power management applications), increasing its own manufacturing efficiency, and increasing output.

On this latter note, it could be argued that building new chip fabs and expanding existing ones can be expensive. This spending could significantly decrease profitability in the coming years, not increase profits. But STMicro is getting some help here. Just as the U.S. is interested in strengthening chip supplies and bringing some manufacturing back home (like via the U.S. CHIPS Act), so is Europe.

In the Q2 2022 conference call, management highlighted a deal it struck with chip manufacturing expert GlobalFoundries ( GFS 5.37%) to build a new fab next to its current operation in Crolles, France. The expansion will get “significant financial support from the State of France.”

In other words, chip manufacturing is being targeted by countries around the globe in a push to mitigate future supply chain disruptions like what happened during the pandemic. Domesticating production could help, and it also brings jobs back to industrialized countries that have been offshoring them for decades. With governments offering financial support to get the job done, good things could be ahead for companies like STMicro and its shareholders.

Granted, there are risks for this stock — especially for U.S.-based investors. In particular, the Federal Reserve’s aggressive interest rate increases have the U.S. dollar on an incredible run-up against other currencies like the euro. A stronger dollar decreases the value of revenue reported in other currencies. Plus, though STMicro is getting some government aid to expand, it is still shelling out cash right now to purchase equipment. Cash used in investing activities increased nearly 150% year-over-year in Q2 2022 to $676 million.

Nevertheless, STMicroelectronics is worth […]

source 1 Little-Known Chip Stock to Bet on the Auto Industry

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