Maintain Buy on STMicroelectronics: Near-term guidance wobbles, but demand signals remain strong

Overview

This report is HSBC’s post-2Q26 earnings review of STMicroelectronics. The company’s 2Q26 performance was mixed, and 3Q26 guidance was weaker than HSBC had previously expected, so the near-term recovery path is below the market’s optimistic expectations for AI-related demand. However, the report argues that the direction of demand recovery remains clear, with book-to-bill, channel inventory, pricing, capital expenditure, and AI/optical interconnect demand all indicating that the underlying upcycle is still advancing.

Core views

The core view is that the recovery is delayed, but not derailed. HSBC maintains its Buy rating for several reasons: overall book-to-bill is close to 2; book-to-bill is above 1 in all end markets; channel inventory is already below the company’s target; pricing continues to contribute to revenue; and the company has moved its 2026 net capex guidance to the high end of the USD2-2.2bn range, reflecting investment in growth areas such as cloud optical interconnect. HSBC also believes that if the manufacturing reshaping plan is completed on schedule, it will support a significant recovery in gross margin and earnings over the coming years.

Analysis framework

The report combines actual 2Q26 results, company guidance for 3Q26, management conference call takeaways, demand signals by business line, inventory and pricing trends, capital expenditure plans, and medium- to long-term margin targets to revise earnings forecasts, and updates the target price using a discounted FY30e PE multiple approach.

Methodology notes

• Valuation methodsPE multiple discounted fair value

  discounted forward P/E valuation

  HSBC continues to use 18x FY30e PE and discounts fair value by two years using a 9.67% WACC, arriving at a target price of EUR81.00 per share for STMicroelectronics.

• Valuation methodsWACC

  weighted average cost of capital

  WACC is assumed at 9.67%, derived from a 4.25% risk-free rate, 4% equity risk premium, and 1.35 beta.

• operating_analysisbook-to-bill

  book-to-bill ratio

  Management disclosed that overall book-to-bill was close to 2, with all end markets above 1 and communication equipment plus computer peripherals significantly above 2, as a gauge of demand momentum.

• scenario_analysisbase/bull/bear scenario analysis

  scenario analysis

  The report includes base, bull, and bear scenarios for STMicroelectronics to compare different paths for revenue, gross margin, operating profit, and profit before tax.

Asset mapping & comparison

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

• STMicroelectronics (STMPA FP / STMPA.PA)

  Research subject and core equity asset

  Strengths

  Book-to-bill close to 2, channel inventory below target, ongoing price increases, stronger demand from AI data centers and optical interconnect, SiC returning to growth, and capital expenditure focused on growth areas.

  Weaknesses

  2Q26 results were mixed, 3Q26 outlook was below HSBC’s prior expectations, and 2026/2027 revenue and operating profit forecasts were cut.

  Comparison

  The target price implies FY27/28e PE of 33.1x/23x, above the company’s 5-year average 12-month forward PE of 15x, but still within the historical range of 8.3-40.2x.

  Risks

  Near-term recovery pace remains unstable; gross margin improvement depends on utilization and the manufacturing reshaping plan; FX offers no positive contribution; and underutilization charges plus input costs may weigh on margins.

• AI data centre / optical connectivity exposure

  Medium- to long-term growth driver

  Strengths

  Management raised AI data center revenue guidance to above USD1bn in 2026 and significantly above USD2bn in 2027, with optical cable connectivity as the main 2027 driver, while capacity expansion at the Crolles plant reduces capacity constraints on silicon photonics IC growth.

  Weaknesses

  Growth delivery depends on customer demand, capacity expansion progress, and supply chain execution.

  Comparison

  Book-to-bill for communication equipment and computer peripherals is significantly above 2, stronger than other end markets.

  Risks

  AI demand volatility, intensifying competition in optical interconnect, and slower-than-expected capacity expansion.

• Silicon Carbide (SiC)

  Product area returning to growth

  Strengths

  2Q26 revenue recovered to low double-digit year-on-year growth, and management expects double-digit year-on-year growth in FY2026, supported by strong orders and design wins.

  Weaknesses

  Gross margin targets depend on the pace of manufacturing migration from 150mm to 200mm.

  Comparison

  Compared with the prior cyclical downturn, SiC has returned to a growth range.

  Risks

  EV and industrial demand below expectations, delays in manufacturing migration, and pricing pressure.

Key data

• RatingBuyHSBC maintains its Buy rating.
• Target priceEUR81.00Lowered from EUR84.00 to EUR81.00.
• Current share priceEUR46.76As of the close on 24 July 2026.
• Upside potential+73.2%Upside from target price relative to the share price.
• 2026/2027 revenue forecast revision-1.7% / -1.1%Reflects 2Q26 results, 3Q26 outlook, and management comments.
• 2026/2027 adjusted operating profit forecast revision-4.4% / -5.9%Near-term profit expectations were cut more than revenue.
• Adjusted EPS forecast2025: USD0.5; 2026e: USD1.4; 2028e: USD4.1; 2030e: USD6.2HSBC expects earnings to recover significantly from the 2025/2026 trough.
• Book-to-bill ratioclose to 2Management said overall book-to-bill was close to 2, with all end markets above 1.
• 3Q26 gross margin guidance37% ± 2pptIncludes around 70bp drag from underutilization charges.
• 2026 net capital expenditurehigh end of the USD2-2.2bn rangeInvestment focus includes growth areas such as cloud optical interconnect.
• AI data center revenue guidanceabove USD1bn in 2026; significantly above USD2bn in 2027The main growth driver in 2027 comes from optical cable connectivity.
• Medium- to long-term gross margin targetsgross margin above 40% at quarterly revenue of USD4bn; 2028 gross margin target of 45%Dependent on the manufacturing reshaping plan being completed on schedule.

Impact & implications

The implication for the investment view is that the cuts to near-term earnings forecasts and target price reflect a weaker-than-expected recovery path, but the strength of demand and incremental AI/optical interconnect growth still make medium- to long-term earnings leverage attractive. If orders, pricing, and capacity reshaping progress are delivered, STMicroelectronics’ revenue, gross margin, and EPS could continue improving through 2027-2030; conversely, if 3Q/4Q guidance remains weak or manufacturing reshaping is delayed, the pace of valuation recovery may come under pressure.

Risks

• 3Q26 outlook was below expectations, indicating the recovery trajectory is slower than previously anticipated.
• The extent of gross margin improvement in 4Q26 remains uncertain, with no FX tailwind and underutilization charges continuing to drag.
• The manufacturing reshaping plan requires migration from 200mm to 300mm silicon lines and from 150mm to 200mm SiC lines; if it cannot be completed by the end of 2027 as planned, the >40% or 45% gross margin targets are at risk.
• Input cost inflation is being offset by price increases, but pricing cadence differs across markets, so price pass-through may be uneven.
• Growth expectations for AI data centers, optical interconnect, and silicon photonics are high; if demand or capacity delivery falls short, valuation recovery may be constrained.
• HSBC discloses potential conflicts of interest with the company, including investment banking, market making, or position holdings; investors should make an independent judgment based on the full disclosures.

What to watch

• September quarter results to be released on 29 October 2026, with focus on demand trends and 4Q26 outlook.
• End-demand data points to be disclosed over coming months by analog, optoelectronics, and related peers.
• Whether overall and end-market book-to-bill ratios remain elevated, especially in communication equipment and computer peripherals.
• Whether channel inventory continues to stay below target levels and whether price increases can keep contributing to revenue.
• Whether AI data center revenue delivers on guidance of above USD1bn in 2026 and significantly above USD2bn in 2027.
• Whether Crolles plant expansion, silicon photonics IC capacity, and the manufacturing reshaping plan progress on schedule.
• Whether 3Q26 gross margin of 37% ± 2ppt and sequential improvement in 4Q26 can be achieved.