Damo: Gross margin recovery path clearly reaffirms STM.US's (STM.US) “gain” rating

The Zhitong Finance App learned that Morgan Stanley released a report stating that the overall results of STM.US (STM.US) for the third quarter were in line with expectations. Although earnings per share (EPS) were slightly lower than the consensus, the fourth quarter guidance was in line with expectations, temporarily calming market concerns. As the structural gross margin increase brought about by the restructuring of the fab gradually materialized, Damo maintained an “gain” rating on STMicroelectronics and set a target price of 65 euros.

The report points out that after experiencing large fluctuations in profit margins in the previous quarter, the “stability” shown in this financial report itself is a positive sign. Third-quarter sales and gross margin (37.3%) were generally in line with expectations. Fourth-quarter sales guidance was US$4.15 billion and gross margin guidance was 39%, in line with expectations (of which gross margin guidance was 86 basis points higher than market consensus). Although EPS in the third quarter was 10% lower than the market consensus, the fourth quarter guidance that the market is most concerned about was implemented as scheduled, allowing the debate on profit margins to continue to be anchored on the track of structural improvements.

The main views of Damo are as follows:

The path to improving profit margins remains unchanged, and the target has been achieved or postponed until mid-2028

Management reaffirmed the gross margin target of 44%-46% and emphasized that the manufacturing footprint reshaping plan will result in a structural gross margin increase of more than 400 basis points. Although gross margin for the third quarter still absorbed about 60 basis points of idle capacity expenses and 40 basis points of non-recurring transfer costs, management expects these expenses to largely disappear in the second half of 2027. Daimo believes that considering the time required for customers to migrate from traditional products, the time to achieve this goal may be closer to mid-2028 rather than the end of 2027.

Data centers and LEO business drive growth, consumer electronics remain weak

The performance of various terminal markets is divided: artificial intelligence data centers (AI DCs) continue to lead the way. The related revenue is expected to be around US$1.3 billion in 2026, which is significantly higher than US$2 billion in 2027, mainly driven by silicon optical chips, electronic ICs, microcontrollers and power solutions. The low-orbit satellite (LEO) business is expected to be at least the same as 2026 and likely higher due to limited production capacity; the industrial sector shows the clearest cyclical flexibility, with year-on-year growth guidance of 40%-50% in the fourth quarter. Relatively speaking, the performance of personal electronics (Personal Electronics) is weak, and is expected to remain weak in 2027, which may be affected by the shortage of smartphone DRAM and the lack of incremental new content.

Seasonal performance will change in 2027, and the 2027/28 EPS forecast will be raised

Management advised that due to the revenue structure being skewed towards businesses such as data centers and low-orbit satellites, the seasonal characteristics of 2027 will be different from the historical pattern, and more detailed guidance will be provided in January 2027 (when the fourth quarter financial report is released). Although the forecast for total sales in 2027 remains essentially unchanged at around $18 billion, Damo raised its 2027 and 2028 earnings per share (EPS) forecasts by 11% and 2%, respectively, to reach $3.21 and $4.10, based on improved profit margin progress.