STMicroelectronics Downgraded to Neutral Rating

STMicroelectronics (EPA:STMPA) has been downgraded to a "neutral" rating from "overweight" by J.P. Morgan analysts in a research note dated Monday.

The change in outlook reflects ongoing challenges in the semiconductor company's key end markets, notably the automotive sector, and a lack of short-term growth catalysts.

As per the analysts, the automotive segment, which accounts for about 46% of STMicro's revenue, is expected to continue grappling with elevated inventory levels into 2025.

Analysts flagged that inventory destocking in the automotive supply chain has been slower than anticipated, with tier-1 auto suppliers reporting higher-than-average inventory days compared to pre-pandemic levels.

This situation poses a significant risk to STMicro's revenue and profitability in the near term.

In the industrial segment, while inventory levels are gradually declining, the pace of normalization remains insufficient to offset broader market challenges. J.P. Morgan noted that the industrial sector, another crucial revenue driver for STMicro, is still burdened by inventory overhang, which is expected to linger through the first half of 2025.

Adding to these headwinds, the company has signaled a weak start to the upcoming year. STMicro's guidance suggests a sequential sales decline of about 18% in the first quarter of 2025 compared to the fourth quarter of 2024.

This anticipated downturn reflects broader market pressures, including declining gross margins due to lower capacity utilization, reduced capacity reservation fees, and price declines that were previously mitigated by supply shortages.

The analysts at J.P. Morgan adjusted its price target for STMicro to €30 from the earlier €35, reflecting a more cautious outlook on the company's earnings potential.

Analysts expect STMicro's 2025 earnings before interest and taxes to reach $861 million, significantly below the Bloomberg consensus of $1.4 billion.

This sharp divergence underscores the extent of the challenges analysts foresee for the company in the near term.

Despite a longer-term positive view tied to potential improvements in its high-margin microcontroller unit business and opportunities from a new Apple (NASDAQ:AAPL) contract in the latter half of 2025, J.P. Morgan emphasized the importance of caution.

They noted that the magnitude of the earnings risks and inventory issues in the automotive and industrial markets currently outweigh these potential positives.

With this downgrade, J.P. Morgan’s position aligns STMicro's rating with that of its key competitor, Infineon (OTC:IFNNY) Technologies, which also holds a neutral rating.