STMicroelectronics Stock Is Cheap and Could Triple From Current Levels

STMicroelectronics stock
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STMicroelectronics Looks Excessively Cheap

The Nasdaq fell by more than two percent on October 4 as the selling pressure that surfaced in September continued to hold. Now some argue that there may be a shift from the risk-on trade to lower beta blue chips and large-caps, but my view is that major selling opens opportunities for traders and investors.

When screening for beaten-down large-cap technology stocks, I came across STMicroelectronics NV (NYSE:STM), a cheap semiconductor stock that is trading at a ridiculous 27% of its estimated five-year compound annual growth rate (CAGR) for earnings.

STM stock declined to a fresh 52-week low on October 5, down 34% from its range high. The sell-off affords traders a good potential entry point if you are willing to be patient.

STMicroelectronics is intriguing since it is a play in the Internet of Things (IoT) and advanced driver-assistance systems (ADAS) areas, both of which are high-growth sectors.

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The company’s chips are found in numerous IoT applications in homes, roads, and smart cities.

In my view, STMicroelectronics is a stock of the future, holding tens of thousands of patents. Furthermore, its operations are global, in 35 countries.

Interesting developments include producing the world’s smallest motor drivers for devices. The company has been working with QUALCOMM, Inc. (NASDAQ:QCOM) in building sensors for smart mobile devices.

As an investor, you have to think that STMicroelectronics has much more room to grow, given its massive treasure chest of patents.

The below chart shows STM stock breaking below $21.00 support from its sideways channel and then going back to the levels seen in mid-2017. The downside risk is support at $14.00–$16.00.

Chart courtesy of StockCharts.com

STM stock needs to see a rise in relative strength. My view is that STMicroelectronics stock could rally back to the previous channel at $21.00 and take a run at the $25.00 resistance, representing a potential 38% gain to start.

Why STM Stock Is Undervalued

STMicroelectronics NV’s revenue increased in 2016 and 2017 after a decline in 2015. The revenue growth of 19.7% to $8.3 billion was a marked improvement over the prior two years.

Fiscal Year

Revenue (Billions)
2014

$7.4

2015

$6.9
2016

$7.0

2017

$8.3

(Source: “STMicroelectronics N.V. (STM),” Yahoo! Finance, last accessed October 5, 2018.)

STMicroelectronics is estimated to continue its revenue growth at 16% to $9.7 billion in 2018, but then moderate its growth to 8.1% (to $10.5 billion) in 2019. (Source: Ibid.)

STM is profitable, with higher generally accepted accounting principles (GAAP) earnings in three straight years.

Fiscal Year

GAAP Earnings (Millions)

2014

$128.0
2015

$104.0

2016

$121.0
2017

$218.0

(Source: Ibid.)

For full-year 2018, STMicroelectronics is estimated to ramp up its adjusted earnings per share (EPS) to $1.36, up from $0.93 per diluted share in 2017. The EPS growth is expected to rise to as high as $1.65 in 2019. (Source: Ibid.)

Analyst Take

The STM stock valuation is dirt-cheap. It’s true that there is a tariff risk that could hurt its results, but the fact is that the low valuation offers investors a buffer.

STMicroelectronics trades at a mere 10.6 times its high EPS estimate for 2019. This is attractive and, when you consider that the price/earnings to growth (PEG) ratio is only 0.3 (a PEG ratio of 1.0 implies a fair price), you’d understand why I think STM stock is inexpensive.

Let’s assume a PEG ratio of 1.0: STMicroelectronics would be trading at $64.63, well above the prevailing price of around $17.50.