Morgan Stanley Raises Target Prices for Infineon and STMicroelectronics, Bullish on AI and Optical Drivers

Overview

Morgan Stanley has published an in-depth report on the European semiconductor sector, focusing on Infineon Technologies and STMicroelectronics. The core thesis is that despite significant year-to-date stock price gains, the structural growth drivers—such as AI data centers, optical communications, and low Earth orbit (LEO) satellites—remain underpriced, leaving room for further structural re-rating. Meanwhile, clear signs of cyclical recovery support higher valuations. Accordingly, the firm maintains an 'Overweight' rating on both companies and substantially raises their target prices.

Core views

Infineon: Key beneficiary of AI data center power semiconductors. The report raises Infineon’s target price to €91. The core rationale lies in upward revisions to assumptions about Infineon’s dollar content in NVIDIA’s Rubin Ultra and Feynman racks. As Agentic AI drives increased CPU demand, gallium nitride (GaN) content in Intermediate Bus Converters (IBC) and Voltage Regulator Modules (VRM) rises significantly. Specifically, the estimated power semiconductor value in Rubin Ultra racks is now $170/kW. Additionally, Infineon’s 'Smart Power Fab' in Dresden will open on July 1, showcasing its manufacturing capabilities and potentially providing updated guidance on data center revenue—a near-term stock catalyst. STMicroelectronics: Re-rating potential in optical and LEO businesses. The report raises STMicroelectronics’ target price to €74 and applies a sum-of-the-parts (SOTP) valuation for the first time. It argues that as data center networks shift from copper to photonics and LEO satellites emerge as a major growth vector, STMicroelectronics’ optical and LEO segments deserve higher valuation multiples. The firm assigns an 18x P/E multiple to the core cyclical business and a 36x P/E multiple to the high-growth optical and LEO segments. The 2027 LEO sales forecast is raised to $1.25 billion, driven by a 52% CAGR in user terminals. Cyclical recovery confirmed. Beyond structural narratives, fundamentals are improving at both companies. Management notes continued recovery in industrial distribution channels, automotive inventory restocking, low customer inventories, improving lead times, and rising order intake. These indicators align with trends seen among global analog peers, confirming a cyclical inflection point.

Analysis framework

This report employs a dual-driver analytical framework combining 'structural catalysts + cyclical recovery.' First, it uses bottom-up analysis to quantify incremental demand for specific power semiconductor components (e.g., IBC, VRM) resulting from changes in AI data center architectures (e.g., new NVIDIA racks), thereby revising revenue forecasts. Second, it introduces a sum-of-the-parts (SOTP) valuation approach, separating high-growth emerging businesses (data centers, optics, LEO) from traditional cyclical operations to capture divergent growth profiles. Finally, it validates the cyclical trough using inventory cycle indicators (inventory levels, lead times, order intake), providing a margin of safety for valuation multiple expansion.

Methodology notes

• Valuation MethodSOTP Valuation

  Sum-of-the-Parts (SOTP) Valuation

  Assigns different valuation multiples to distinct business segments (e.g., high-growth AI/optical vs. traditional cyclical businesses) and sums them to reflect each segment’s intrinsic value more accurately, avoiding undervaluation of high-growth units under a single-multiple approach.

• Industry/ Sector Analysis FrameworkVolume-Price Breakdown

  Dollar Content Analysis

  Analyzes changes in the quantity and unit price of specific components (e.g., GaN power devices) within new technology architectures (e.g., AI server racks) to estimate revenue uplift for upstream suppliers.

• Cycle & Sentiment FrameworkInventory cycle (Kitchin)

  Inventory Cycle Inflection Point Identification

  Uses high-frequency indicators such as customer inventory levels, lead times, and order intake to determine whether the industry is transitioning from destocking to restocking, confirming cyclical recovery.

Asset mapping & comparison

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

• Infineon Technologies AG (IFXGn.DE)

  Beneficiary: Increased power semiconductor content in AI data centers, especially GaN adoption in IBC and VRM.

  Strengths

  Full-stack power semiconductor solutions; growing share in NVIDIA and TPU racks; capacity secured by new Dresden fab.

  Weaknesses

  Traditional automotive and industrial businesses remain exposed to macroeconomic volatility.

  Comparison

  Data center business trades at 50x P/E, still below U.S. peer Monolithic Power Systems (55x), suggesting catch-up potential.

  Risks

  Slower EV and ADAS adoption; China design restrictions limiting long-term market share expansion.

• STMicroelectronics NV (STMPA.PA)

  Beneficiary: Transition to optical interconnects in data centers and surging demand for LEO satellite user terminals.

  Strengths

  Critical BiCMOS technology position in user terminals; broad optical portfolio (PICs/EICs).

  Weaknesses

  Core MCU and analog businesses face pricing pressure and inventory adjustments.

  Comparison

  SOTP valuation assigns 36x P/E to optical/LEO segments versus 18x for traditional business, highlighting growth premium.

  Risks

  Reduced sensor content in key smartphones; DRAM shortages impacting auto sales; weak MCU pricing.

Key data

• Infineon Target Price€91Previously €63; increase reflects higher multiple for data center business
• STMicroelectronics Target Price€74Previously €46; based on SOTP valuation
• Infineon Rubin Ultra Power Semiconductor Estimate$170/kWPreviously $159/kW; reflects higher GaN content
• STMicroelectronics 2027 LEO Sales Forecast$1.25BPreviously $1.08B; user terminal CAGR raised to 52%
• Infineon Data Center Business Valuation Multiple50x P/EBased on FY28e estimates; below U.S. peer Monolithic Power Systems
• STMicroelectronics Optical/LEO Business Valuation Multiple36x P/EBased on FY28e estimates; reflects structural growth potential

Impact & implications

The report argues that the market continues to value European semiconductor companies primarily through a traditional cyclical lens, overlooking their structural growth opportunities in AI infrastructure and emerging communication domains (optical networking, satellite internet). By applying SOTP valuation, the firm reveals the current undervaluation of these high-growth segments. For investors, this implies that even after significant YTD gains, valuations still have upside potential supported by both new structural narratives and cyclical recovery. Key upcoming validation points include Infineon’s Dresden fab opening and STMicroelectronics’ ramp-up in optical revenue.

Risks

• Persistent weakness in global auto sales or低迷 PMI readings
• Capex ramp-up leading to overcapacity and impaired future returns
• Slowing order backlog growth
• China-local design restrictions limiting long-term market share expansion
• Weaker MCU pricing due to channel inventory corrections
• Reduced sensor content in key smartphone models

What to watch

• Infineon’s 'Smart Power Fab' opening in Dresden on July 1 and any potential updates on data center revenue
• Significant ramp-up in STMicroelectronics’ optical revenue in H2 2026 / 2027
• Whether cumulative LEO sales exceed $3 billion between 2026–2028
• Sustainability of inventory restocking in automotive and industrial end markets