An Under-Known Chip Stock Has Been Given A 50% Upside By Bank Of America

Despite a challenging year in 2022, the semiconductor sector is on a roll this year after a challenging year in 2021.

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It has been an interesting year so far for the iShares Semiconductor ETF, which tracks the semiconductor sector, which is up 22% in the year to date, almost three times what the S&P 500 has returned in the same period.

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A lesser-known chip stock has been doubling down on Bank of America, even as Nvidia has been one of the sector's biggest winners this year.

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The investment bank maintained the "buy" rating it had previously assigned to chip maker STMicroelectronics, in a note that was posted on April 11. Considering that the company's shares are traded in France and the U.S., the target price for its stock in the US is $78 – implying an upside of more than 50% for the company.

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Based on FactSet data, analysts covering the stock, on average, have predicted a potential upside of 16.1% for this stock, according to its analysts.  

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The Bank of America described the company as a "top pick" among European auto semiconductor companies and said that despite the firm's recent growth, it continues to trade at a discount to its peers.

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There are three reasons why we think the stock, led by Didier Scemama of Bank of America, trades at a discount to [European and U.S.] peers: 1) an imperfect track record, 2) a high concentration of Apple stocks, and 3) a high capital intensity and low cash returns, Analysts at Bank of America said.

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Despite the company's poor track record and high Apple concentration, the bank anticipates concerns to ease in the next 12-18 months as gross margins and operating margins improve. By the end-2024, Apple's revenue share will also drop to around 10%.

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The company's product portfolio also includes a broad range of microcontrollers, which are used extensively in numerous automotive applications, including position sensors, windshield wiper motors, power steering systems, and advanced driver assist systems such as lane-keeping systems and parking assist.

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Among STMicroelectronics' direct competitors, Taiwan Semiconductor Manufacturing Company and United Microelectronics Corporation outsource the production of 300mm wafers in Europe to Taiwanese foundries such as Taiwan Semiconductor Manufacturing Company and United Microelectronics Corporation, the analysts said.

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Analysts think the company can gain incremental share in autos and industrial control systems by offering customers de-risked supply chains.

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STMicroelectronics will continue to benefit disproportionately from the growing onshoring trend of diversifying from Taiwan-based suppliers, analysts admit, although share gains will be "slow."

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“Its exposure to Apple, along with the loss of a major contract, is baked in at the current price, according to us. However, we expect the company to outperform its peers over the next two years both in terms of sales and [earnings before interest, taxes, depreciation, and amortization]. Consequently, the analysts said, when clarity is reached over the Apple relationship and once the market better understands the company's growth prospects, we will expect a gradual rerating.”

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