Maintain Neutral on STMicroelectronics: Clear Growth Momentum, but Limited Valuation Upside

Overview

This report examines STMicroelectronics' revenue growth and gross-margin elasticity during the new semiconductor upcycle. JPMorgan believes that AI data center optical connectivity and LEO satellites are the company's new primary growth drivers, leading to upward revisions to revenue, gross profit, EBIT, and EPS forecasts; however, because the current business mix differs from the previous peak in 2023, and incremental growth includes optical foundry services and satellite businesses with consumer characteristics, it remains uncertain whether gross margin can significantly exceed the previous peak.

Core views

The core conclusion is that STMicroelectronics will most likely be able to return to the underlying peak gross-margin level of the previous cycle, but there is not yet sufficient evidence that peak gross margin will be materially higher than in the past because of its AI and satellite businesses. AI optical connectivity demand, AWS-related exposure, LEO satellite ramp-up, and semiconductor-cycle recovery improve medium-term revenue visibility; however, the company plays more of a foundry role in optical businesses, while satellite businesses have consumer characteristics, potentially diluting the gross-margin mix. Given the limited upside implied by the target price, the report maintains a Neutral rating.

Analysis framework

The report analyzes the company along three main lines: first, it breaks down the revenue contribution, market share, and customer drivers of AI data centers and LEO satellites; second, it revisits the 2023 peak gross margin and excludes capacity reservation fees and foreign-exchange effects to derive an underlying peak gross margin of approximately 43.1% as a reference for the current cycle; third, it builds EPS scenarios based on FY28 revenue, gross-margin, and expense assumptions, and estimates the target-price range using a 20x forward P/E.

Methodology notes

• Valuation methodsForward P/E valuation

  Values the company at 20x forward P/E based on FY28 EPS.

  STMicroelectronics' P/E quartile range over the past 10 years was 13.1x to 22.0x, with the mean and median at approximately 18.2x and 18.6x, respectively. The report believes that its structural growth exposure warrants a valuation above the historical average, and therefore applies a 20x forward P/E to derive a Dec-27 target price of €71.50.

• Earnings qualityUnderlying gross-margin reconstruction

  Comparison of peak gross margins after excluding unsustainable or non-comparable factors.

  The report excludes the contribution of approximately $600m in capacity reservation fees and the impact of changes in the euro-to-U.S.-dollar exchange rate from the reported 2023 gross margin of 47.9%, estimating an underlying gross margin of approximately 43.1% and using it as the primary reference for peak gross margin in the current cycle.

• Scenario analysisEPS scenario analysis

  Estimates FY28 EPS and share-price upside under different peak quarterly revenue and gross-margin assumptions.

  The report assumes peak average quarterly revenue of $4.6bn, $4.8bn, and $5.0bn, with gross margins of 42.5%-43.5%, producing EPS of approximately $3.68 to $4.48 and corresponding valuations of approximately €64.5 to €78.5.

Asset mapping & comparison

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

• STMicroelectronics (STMPA.PA)

  Core covered security

  Strengths

  AI data center optical connectivity, analog and power devices, LEO satellites, and semiconductor-cycle recovery provide revenue growth momentum; FY26-FY28 revenue and EPS forecasts have both been raised.

  Weaknesses

  Current upside is limited; the incremental growth mix includes optical foundry services and satellite businesses with consumer characteristics, leaving the magnitude of gross-margin improvement uncertain.

  Comparison

  The 10-year P/E quartile range is 13.1x to 22.0x; the report applies a 20x forward P/E, slightly above the historical average and median.

  Risks

  A stronger euro against the U.S. dollar, a weaker-than-expected semiconductor recovery, Apple unit sales or content below expectations, and insufficient gross-margin expansion.

• Global Foundries

  Optical foundry comparable company

  Strengths

  Used as a comparable company in optical foundry services to help assess the gross margin of STMicroelectronics' optical foundry business.

  Weaknesses

  Its historical peak gross margin was below STMicroelectronics' overall gross margin, weakening the evidence that optical foundry services could materially raise the company's gross margin.

  Comparison

  The report notes that its gross margin near the previous peak was approximately 29.4%, below that of STMicroelectronics.

  Risks

  The comparable business structures are not fully consistent, and historical gross margins may not fully represent the future profitability of dedicated optical capacity.

• Tower Semiconductor

  Optical foundry comparable company

  Strengths

  Used as a comparable company in optical foundry services to help assess STMicroelectronics' margin potential in Photonic IC foundry services.

  Weaknesses

  Its historical gross-margin level was also below STMicroelectronics' overall gross margin.

  Comparison

  The report notes that its gross margin near the previous peak was approximately 28.8%, below that of STMicroelectronics.

  Risks

  Optical businesses were not its primary business at the time, so historical data has limited explanatory power for the current optical-connectivity supply-and-demand environment.

Key data

• RatingNeutralNeutral rating maintained.
• Target price€71.50The previous target price was €48.00, with a target-price horizon of Dec-27.
• Current price€62.58The price date shown in the report is June 26, 2026.
• Implied upside~12.5%-13%The report believes approximately 25%-30% upside would be required to take a more constructive view of the rating.
• FY26/FY27/FY28 revenue forecast changes+1.9%/+4.5%/+9.0%Driven by AI optical connectivity demand and LEO satellite growth.
• FY26/FY27/FY28 EPS forecast changes+11.6%/+9.2%/+15.2%Driven by higher revenue estimates, gross-margin improvement, and operating leverage.
• 2026 AI data center revenue expectation~$1bnThe company indicated that it could double again in 2027.
• Optical connectivity share of AI revenueApproximately 70% in 2026, up to approximately 80% in 2027Optical connectivity is the primary component of AI revenue.
• LEO satellite revenue~$600m in 2025, ~$1bn in 2026, cumulative >$3bn in 2026-2028Growth is driven by LEO constellation construction, broadband users, and terminal demand.
• Underlying peak gross-margin reference~43.1%Estimated based on the previous peak in 2023 after excluding capacity reservation fees and foreign-exchange effects.

Impact & implications

For investment implications, the report recognizes that STMicroelectronics is gaining clearer structural growth exposure and accordingly raises earnings estimates and the target price; however, the share price has already substantially reflected expectations for semiconductor-cycle recovery, AI exposure, and satellite growth. If gross margin only returns to around the previous underlying peak, there is limited room for further re-rating at the current valuation; if AI optical connectivity and satellite businesses generate greater-than-expected scale effects or higher gross margins, there is room for an upgrade in the rating and target price.

Risks

• A stronger euro against the U.S. dollar could pressure dollar-denominated revenue and margins under the euro-cost structure.
• A weaker-than-expected semiconductor-industry recovery could affect revenue growth and improvements in capacity utilization.
• Apple unit sales or STMicroelectronics' content in Apple products below expectations could weigh on consumer-business performance.
• The AI optical-connectivity business has strong foundry characteristics, and its gross margin may be below that of the company's traditional product businesses.
• The LEO satellite business has consumer characteristics, and a higher share could dilute the overall gross margin.
• If restructuring cost savings fall short of expectations, FY28 operating leverage and EPS scenarios could be revised downward.

What to watch

• Whether quarterly revenue in the second half of FY26 can approach or exceed $4bn, validating management's conditions for gross margin to return above 40%.
• Whether AI data center revenue achieves the approximately $1bn target for 2026 and shows signs of doubling in 2027.
• Whether optical-connectivity revenue reaches the expected approximately 70% of AI business in 2026 and approximately 80% in 2027.
• Whether Photonic IC market share can rise from approximately 5% toward the 30% target by 2028.
• Whether LEO satellite revenue reaches approximately $1bn in 2026 and can support guidance for cumulative 2026-2028 revenue above $3bn.
• Whether underlying gross margin can return to approximately 43.1% and whether evidence of scale effects exceeding the previous peak emerges.
• The combined impact of EUR/USD trends, capacity utilization, and the withdrawal of capacity reservation fees on gross margin.