Morgan Stanley: Gross margin recovery path is clear; reiterates "Overweight" rating on STMicroelectronics NV ADR RegS (STM.US)

Morgan Stanley issued a report noting that STMicroelectronics NV ADR RegS (STM.US)'s third-quarter results were broadly in line with expectations. Although earnings per share (EPS) came in slightly below consensus, fourth-quarter guidance met expectations, temporarily easing market concerns. As the structural gross margin improvement from fab restructuring is gradually realized, Morgan Stanley maintains its "Overweight" rating on STMicroelectronics NV ADR RegS and sets a target price of EUR 65. The report noted that after the significant margin volatility in the previous quarter, the "stability" presented in this earnings report is itself a positive signal. Third-quarter sales and gross margin (37.3%) were basically in line with expectations, and fourth-quarter sales guidance was US$4.15 billion with gross margin guidance of 39%, in line with expectations (with gross margin guidance 86 basis points above market consensus). Although third-quarter EPS was 10% below market consensus, the fourth-quarter guidance that the market was most focused on landed as scheduled, allowing the margin debate to remain anchored on a trajectory of structural improvement. Morgan Stanley's main points are as follows: Margin improvement path unchanged; target achievement may be delayed to mid-2028 Management reiterated its 44%-46% gross margin target and emphasized that the manufacturing footprint reshaping plan will bring more than 400 basis points of structural gross margin improvement. Although third-quarter gross margin still absorbed about 60 basis points of idle capacity charges and 40 basis points of non-recurring transfer costs, management expects these costs to largely disappear in the second half of 2027. Morgan Stanley believes that, considering the time required for customers to migrate from legacy products, the timing for achieving this target may be closer to mid-2028 rather than late 2027. Data center and LEO businesses drive growth; consumer electronics remains weak Performance across end markets was mixed: AI data centers (AI DC) continued to lead, with related revenue expected to be about US$1.3 billion in 2026 and clearly above US$2 billion in 2027, mainly driven by silicon photonics chips, electronic ICs, microcontrollers, and power solutions. The low Earth orbit satellite (LEO) business, constrained by capacity, is expected to see 2027 revenue at least flat versus 2026 and possibly higher; the industrial segment showed the clearest cyclical elasticity, with fourth-quarter year-on-year growth guidance of 40%-50%. In relative terms, personal electronics performed weakly and is expected to remain weak in 2027, possibly affected by the smartphone DRAM shortage and the lack of incremental new content. 2027 seasonality will change; 2027/28 EPS estimates raised Management indicated that, due to the revenue mix shifting toward businesses such as data centers and low Earth orbit satellites, seasonality in 2027 will differ from historical patterns, with more detailed guidance to be provided in January 2027 (when fourth-quarter results are released). Although the expectation for total 2027 sales remains basically unchanged at about US$18 billion, Morgan Stanley, based on better margin progress, raised its 2027 and 2028 earnings per share (EPS) estimates by 11% and 2%, respectively, to US$3.21 and US$4.10.