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Although STMicroelectronics' quarterly results were slightly better than expected, the company'sthe second timeThe company lowered its full-year revenue and profit forecasts, causing U.S. stock prices to plummet by more than 13% and European stock prices to plummet by more than 10%.

On Thursday, July 25, STMicroelectronics, a leading global semiconductor company, released its second quarter 2024 financial results.

1) Key financial data

Operating income: Q2 revenue fell more than 25% year-on-year to US$3.23 billion, while market expectations were US$3.2 billion.
Net Profit: Q2 net profit was US$353 million, compared with US$1 billion in the same period last year, and the market expectation was US$323.1 million.
Gross profit (a closely watched indicator in the semiconductor industry): Q2 gross profit fell from US$2.12 billion to US$1.3 billion, with a gross profit margin of 40.1%. The market expected gross profit to be US$1.28 billion.

2) Outlook

Operating income (downward):Q3 revenue is expected to be $3.25 billion, and full-year operating income is expected to be $13.2 billion to $13.7 billion, compared with the previous forecast of $14 billion to $15 billion and the market expectation of $14.29 billion;
Gross profit margin (downward):The gross profit margin for the third quarter is expected to be 38%, and the full-year gross profit margin is expected to be 40%. The previous forecast was just over 40%, and the market expects it to be 41.1% for the full year.

STMicroelectronics' U.S. shares fell more than 13% in early trading on Thursday.

Chip companies under pressure as electric vehicle market slows

STMicroelectronics said that due to the slowdown in demand in the automotive industry, which has led to a reduction in demand for chips, the company had to lower its full-year revenue and profit forecasts for the second time. Previously, in April, the company had adjusted its expectations for the same reason, causing its stock price to plummet in the European market. Analysts pointed out that this may also be a signal of a global economic slowdown.

STMicroelectronics counts Apple, Samsung Electronics, Tesla, Hyundai Motor and General Motors among its customers. While sales of chips for personal electronics are showing signs of recovery, demand from auto and industrial equipment makers remains sluggish.

STMicroelectronics Supply Chain

Despite the surge in demand for AI chips, the entire semiconductor industry is currently facing an overstocking problem. As manufacturers of consumer electronics, automobiles and industrial equipment have delayed orders for new chips, the long-term inventory accumulation has forced major chipmakers to postpone their production equipment investment plans.

The electric vehicle market, an important support for chip manufacturers, has not been immune to the current challenges. From Tesla to Porsche to Ford and Mercedes-Benz, electric vehicle sales are declining. Tesla, the industry leader, saw its profits fall for the second consecutive quarter, reflecting that the electric vehicle market has not yet fully recovered. The slowdown in the electric vehicle market is a major pressure on chip companies, especially those that rely heavily on the electric vehicle market.

CEO Jean-Marc Chery wrote in the company's second-quarter earnings release:

"During the quarter, contrary to our previous expectations, orders from industrial customers did not improve and automotive demand declined. Lower-than-expected automotive sales offset higher sales in the company's Personal Electronics business."

He noted in a conference call with investors:

“We are facing a longer and deeper than expected adjustment in the industrial sector due to weakening demand and a sharp inventory adjustment.”

What does Wall Street think?

JPMorgan analyst Sandeep Deshpande (Overweight) told clients: "Despite slightly better-than-expected results this quarter, the company did not see the expected recovery in industrial orders and auto orders are also declining. The key question is, given the company's consecutive sharp downward revisions to expectations, will the market believe that the worst is over? Although the end data of the auto market still showed a decline this quarter, we believe the market may be close to the bottom of the cycle."

Stifel analyst Juergen Wagner (buy rating) said that due to inventory adjustment pressure in the automotive and industrial sectors, earnings per share are expected to fall by 15% in 2024, which is slightly larger than market concerns.

Bernstein analyst Sara Russo (outperform rating) believes that the automotive business is below expectations, the microcontroller and power and discrete components sectors are underperforming, and the industrial sector has not improved. Although the company's guidance expects a quarter-on-quarter improvement in the fourth quarter, investors' confidence in the company's prospects may be affected given that it has not met expectations for several consecutive quarters. For STMicroelectronics, the difficulty is that it is unclear when the cycle will bottom out.

Citi analyst Andrew Gardiner (buy rating) suggested that the company's performance guidance was lowered more than expected, with revenue expectations for 2024 lowered by 6% and Ebit (earnings before interest and taxes) lowered by an even larger margin. Given that expectations were lowered when both the first and second quarter results were announced, it may indicate that the market is approaching the bottom of the cycle.