Morgan Stanley raises STMicroelectronics target price to €78, believing the earnings potential of optical and LEO is underestimated

Overview

This is a Morgan Stanley earnings preview and valuation update report on STMicroelectronics NV. The report argues that the market underestimates the company's earnings leverage in optical networking, data center, and LEO-related businesses; at the same time, recovering demand in automotive and industrial semiconductors, MCU price increases, and a more favorable product mix could drive FY26 revenue and gross margin guidance above expectations.

Core views

The core view is that short-term 2Q26 results may be broadly in line with expectations, but gross margin and EBIT margin are likely to outperform consensus; in the medium term, accelerating data center optical revenue, along with ramp-up of PIC100 and NPO, will drive growth in FY27 and FY28; over the long term, the earnings contribution from the optical and LEO businesses may be underestimated by the market, and therefore a SOTP framework should assign higher valuation multiples to these structural growth businesses. The report maintains Overweight and raises the target price to €78.

Analysis framework

The report analyzes the company based on prior-quarter guidance, peer commentary, end-market changes, pricing and inventory dynamics, optical and LEO revenue forecasts, 2Q26/3Q26 versus consensus comparisons, and a sum-of-the-parts valuation framework. For valuation, it separates traditional cyclical businesses from optical/LEO structural growth businesses, applies different P/E multiples to each, and discounts them using a 10% WACC.

Methodology notes

• Valuation methodsSOTP

  sum-of-the-parts valuation

  It values the core cyclical business separately from the optical and LEO businesses, using 18x FY28e P/E for the core business and 36x FY28e P/E for the optical and LEO businesses to reflect different growth trajectories.

• Valuation methodsWACC折现

  10% WACC

  After converting FY28e segment earnings using target valuation multiples, the report discounts them using a 10% WACC to derive the €78 target price.

• Earnings forecastMorgan Stanley ModelWare

  analyst forecasts versus consensus comparison

  Financial metrics are based on the Morgan Stanley ModelWare framework and compared against Refinitiv Estimates consensus, with a focus on differences in revenue, gross margin, EBIT margin, and EPS.

• Risk-rewardBull/Base/Bear Case

  scenario analysis

  The report assesses target price sensitivity through bull, base, and bear case scenarios, with key variables including the strength of cyclical recovery, the ramp speed of optical and LEO, macro demand, pricing, and capacity utilization.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• STMicroelectronics NV (STMPA.PA / STMPA FP / ADR STM.N)

  Core covered name, rated Overweight, with a target price of €78.

  Strengths

  Optical networking and data center businesses have been revised upward, with significant ramp potential for PIC100 and NPO; automotive and industrial end markets are gradually recovering; two MCU price increases indicate some pricing power; optical and LEO business gross margins may be above the group average.

  Weaknesses

  Traditional automotive and industrial businesses remain affected by cyclicality; part of the growth depends on converting design wins and optical ramp after FY27; group gross margin is still influenced by capacity utilization and product mix.

  Comparison

  The report notes that Infineon is more focused on power semiconductors, whereas STMicroelectronics' strength lies in optical networking, so upward revisions to data center guidance are more likely to come from photonics demand.

  Risks

  Macro demand weaker than expected, softer MCU pricing, weak automotive and industrial OEM volumes, optical/LEO ramp below expectations, reduced sensor content or design slot losses in key smartphones, and DRAM shortages affecting automotive sales.

Key data

• Target price€78.00Raised from €74.00 to €78.00.
• RatingOverweightIndustry view is In-Line.
• Closing price€62.58As of June 26, 2026.
• FY26 optical revenue forecast$650mnRaised 91% from the previous $340mn, mainly due to an earlier and larger-scale ramp-up of PIC100.
• Data center sales growthFY26-FY28 CAGR 77%，FY28超过$3bnGrowth is supported by optical revenue, PIC sales, and the FY27 NPO ramp.
• FY28 optical and LEO EPS€1.34 / $1.56The combined earnings forecast is raised by 12%, and the report believes the market has not yet fully understood its impact on the earnings trajectory.
• FY28 total EPS$3.97 / €3.45The table shows optical accounts for 26% of EPS, LEO for 13%, and cyclical businesses for 61%.
• 2Q26 revenue forecast$3.468bnBroadly in line with consensus of $3.462bn.
• 2Q26 gross margin forecast35.8%Above consensus of 35.1%, a difference of 70bps.
• 2Q26 EBIT margin forecast8.5%Above consensus of 6.9%, a difference of 164bps.
• 3Q26 revenue guidance forecastabout $3.7bnThe report expects the company may provide revenue guidance of $3.7bn.
• 3Q26 gross margin guidance forecastabout 36.9%About 40bps above consensus, consistent with the trend of sequential gross margin improvement.
• FY26 automotive revenue growth forecast9%Previous forecast was 7%, reflecting increased confidence in automotive recovery.
• FY26 industrial revenue growth forecast30%Previous forecast was 28%, reflecting industrial recovery and product mix improvement.

Impact & implications

If the report's view materializes, the investment case for STMicroelectronics will expand from a pure cyclical recovery story to one of 'cyclical recovery + structural optical/LEO growth.' This would increase market recognition of earnings visibility for FY27-FY28 and could support higher valuation multiples; near-term catalysts include 2Q26 results, 3Q26 guidance, and whether FY26 full-year revenue and gross margin guidance are revised upward.

Risks

• A longer-than-expected period of global macro weakness drags on automotive and industrial OEM volumes.
• The semiconductor industry downturn is deeper and lasts longer than assumed in the model, leading to earnings downgrades.
• MCU pricing weakens during channel inventory correction.
• Sensor content declines in key smartphones or design slot losses occur.
• DRAM shortages affect automotive sales.
• The optical business ramp in 2H26/FY27 is below expectations.
• LEO sales fail to significantly exceed the cumulative FY26-FY28 upside scenario potential of $3bn.
• Underutilization costs persist, making it difficult for gross margin to recover above 35%.

What to watch

• 2Q26 results to be announced on July 23, 2026.
• Whether 2Q26 gross margin reaches or exceeds 35.8%, and whether EBIT margin is significantly above consensus.
• Whether 3Q26 revenue guidance is close to $3.7bn and gross margin guidance is close to 36.9%.
• Whether FY26 full-year revenue and gross margin guidance deliver upside surprises.
• Changes in MCU pricing and whether the company continues to demonstrate pricing power.
• Automotive and industrial end-market orders, book-to-bill, inventory digestion, and design win conversion.
• The ramp pace of PIC100, NPO, and optical networking products in 2H26/FY27.
• Whether data center revenue guidance continues to evolve upward from about $1bn.
• Whether cumulative LEO business sales in FY26-FY28 could exceed $3bn.