STM: The giant stalls on the highway

In 2024, the European automotive sector is experiencing a significant crisis. This downturn is also impacting semiconductor suppliers such as STMicroelectronics (STM), whose growing reliance on the automotive industry is exposing its revenue to economic volatility. Additionally, increasing competition from China is exacerbating the pressure on the electric vehicle market, while STM struggles with a technological lag in advanced chip production.

The European automotive sector is particularly troubled this year. Volkswagen shares have dropped 17% since the beginning of the year. The situation is even more severe in France, with Stellantis down 43% and Renault down 30% from its peak in May. This decline became especially apparent on Monday, September 30, when Stellantis issued a stark profit warning, causing its stock price to plunge by 14%. The automotive sector's weakness is also affecting its entire supply chain, including semiconductor manufacturers such as STMicroelectronics.

Focus on STMicroelectronics (STM)

When discussing the semiconductor sector, one cannot overlook the Franco-Italian company STM. With a market capitalization exceeding €23 billion, it stands as one of the largest companies on the Milan stock exchange and is a constituent of the CAC 40 index. Founded in 1987 through the merger of SGS and a subsidiary of Thomson, STM's primary customers include global technology giants such as Apple, Cisco, Huawei, and Samsung.

The company holds strategic importance for public authorities, with Bpifrance and the Italian Ministry of Economy and Finance each owning a 27.5% stake. The remaining shares are publicly traded, with no significant shareholder holding a substantial stake.

Activities and breakdown of sales

STM's operations are divided into three main segments:

• Automotive and discretionary products
  • This division focuses on integrated circuits (ICs) for automotive applications and power transistors. It includes semiconductors used in engine management, chassis control, safety, and vehicle electronics systems. The segment also covers advanced driver assistance systems (ADAS) as well as silicon carbide (SiC) and gallium nitride (GaN) devices used in hybrid and electric vehicles.

• Microcontrollers and digital processors
  • This segment is centered on general-purpose microcontrollers, microprocessors, connected security products, and associated components, such as secure embedded elements, memory devices, and radio frequency (RF) products. The STM32 family of microcontrollers, which serves a wide array of applications from industrial automation to the Internet of Things (IoT), is a key product in this category.

• Analogue products, MEMS sensors and actuators
  • This division develops analog products, intelligent power solutions, MEMS sensors, and actuators. It caters to a broad spectrum of industries, including consumer electronics, healthcare, automotive, and industrial applications. Its products include sensors (e.g., accelerometers, gyroscopes, temperature sensors) and actuators used in smart devices and automotive systems.

STM has historically been highly dependent on Apple, its largest customer, which accounted for approximately 13% of its sales in 2024, down from 23% in 2020. However, this dependency has shifted towards the automotive sector, which now represents 45% of STM's revenue, compared to 32% in 2020. While this segment offers higher profitability, particularly due to the rise of electric vehicles such as those produced by Tesla, it also exposes the company to greater economic cyclicality.

The engine of growth has stalled

The end of 2024 promises to be as difficult as it began for STM, with sales projected to decline by 22%, dropping from €17.3 billion in 2023 to €13.4 billion in 2024. Net margins are also expected to shrink significantly, from 24.3% in 2023 to 11.3% in 2024. This downturn is largely attributed to the slowdown in the automotive sector, where STM has substantial exposure. In 2024, new car registrations have fallen by 0.48%, reflecting a cautious stance among consumers who are awaiting more affordable electric vehicle models that better meet their needs. The electric vehicle market is also facing intensified competition from China, which is producing high-performance models at much more competitive prices. However, the recent introduction of tariffs on Chinese models sold in Europe may slow this trend.

The recovery is expected to be sluggish, with a return to 2023 sales levels unlikely before 2027, highlighting the long-term damage inflicted on the automotive sector.

AI: A Missed Opportunity

Despite its status as a leading semiconductor manufacturer, STM has not fully capitalized on emerging technological trends, particularly the rise of artificial intelligence (AI). France's two major semiconductor producers, Soitec and STM, are lagging behind their Taiwanese and Korean competitors, such as TSMC and Samsung, which manufacture chips with a higher etch precision. As a result, these companies are focusing on less technologically demanding sectors, such as automotive, household appliances, and the Internet of Things (IoT). In contrast, the more profitable markets—such as graphics processing units (GPUs) and servers—remain beyond their reach. For instance, while TSMC is producing chips with an etch fineness of 3 nanometers, STM’s STM32 microcontrollers are etched at 40 to 90 nanometers.

This limited exposure to advanced AI technologies mirrors a broader trend across Europe. One notable exception is the Dutch company ASML, the only European firm capable of producing chips with an etch fineness below 10 nanometers.

Technical analysis

Technical analysis, combined with fundamental insights, offers a clearer view of potential trends for STM shares under various scenarios.

STM could see a correction of the uptrend that began with the historic bull market in the indices (March 2009). If the automotive sector fails to recover swiftly or if the tariffs on Chinese vehicles prove ineffective, the support zone between €8.76 and €12.25 could be reached in the coming years. This range is determined by key Fibonacci retracements on a logarithmic scale.

The next major support level is at €21. A downward breach of this level would be negative for the stock’s outlook. However, if this support holds, a bullish recovery could drive the share price as high as €61. This optimistic scenario could materialize if STM closes the technology gap or if the automotive sector experiences a strong rebound, fueled by the expansion of electric vehicles.

STM.Fr in M1. Source : xStation.

STM will publish its results for the third quarter of 2024 on 31 October. The share is currently down 47.5% from its July 2023 highs.