Investing.com -- Morgan Stanley (NYSE:MS) upgraded STMicroelectronics NV ADR (NYSE:STM) to Equal Weight from Underweight.
Despite ongoing challenges with margins and visibility on demand, particularly in the automotive sector, Morgan Stanley anticipates the market will shift its focus toward the potential for a recovery in fiscal year 2026 (FY26).
The bank’s analysts project STM’s first-quarter sales to decrease by approximately 24% quarter-over-quarter, and the pricing dynamics for key products remain uncertain due to full channel inventory and ongoing contract price resets.
“The hope now is that we have seen the margin trough for STM, albeit what a margin recovery would look like from here seems tricky to model given the number of moving parts,” analysts led by Lee Simpson noted.
“There are also ongoing under-utilization charges, reservation fees (albeit declining), a likely growing depreciation, weak SiC sales and a capacity build,” they added.
STM outlined tough channel dynamics, especially in general-purpose microcontrollers (MCUs) used in automotive and industrial applications. The semiconductor manufacturer has indicated that the effects of the current inventory correction could persist through 2025.
“There are three things to consider here: (i) for STM, it will take time to see the positive impact from recent design wins in China, (ii) management believes underlying MCU demand is not strong enough to trigger an upturn, and (iii) the level of competition means pricing resilience and margin recovery is probably thin,” the report states.
Furthermore, there are signs now pointing to a possible end device overbuild in China, which may take a while to digest should tariffs increase.
Alongside the upgrade, Morgan Stanley has adjusted its FY25 and FY26 sales, margins, and EPS estimates for STM.
With investors likely to begin discussions about a possible recovery in 2026, the firm has based its valuation on the next year’s EPS (FY26) of approximately $1.62.
Considering STM’s historical up-cycle multiple ranging from 12-20x, Morgan Stanley has applied a multiple near the lower end of this spectrum at 14x, concluding a fair value of €22 per share.