STMicroelectronics Waiting on the IoT

STM expects the microcontroller market to heat up as the Internet of Things grows through the decade

After weathering the chip slump, STMicroelectronics (NYSE:STM) is set up to be a leader in the Internet of Things.

The Internet of Things combines sensors, analysis software and communications. It brings previously inanimate devices under computer control.

Self-driving cars are the best-known IoT niche. STM lists Tesla (NASDAQ:TSLA) and Intel’s (NASDAQ:INTC) Mobileye unit among its top 10 customers. But traffic lights, sewers, phone networks, and even biological processes, can be constantly monitored and controlled using STM microcontrollers.

A poor first half of 2019 at STM was followed by a strong second half. This sent the shares up 85% over the last six months. At its Feb. 14 opening price of $31.29 per share, STM has a market cap of $28.5 billion against revenues of about $9.5 billion. Its price to earnings ratio of 28 is close to that of Taiwan Semiconductor (NYSE:TSM).

STM Business and Earnings

A valuation like that of TSM makes sense because STM both designs and makes its own chips. Many are made using obscure processes like Fully Depleted Silicon on Insulator (FD-SOI), Radio Frequency Silicon on Insulator (RF-SOI) and Vertical Intelligent Power (VIPower).

For its fourth quarter, announced in January, STM beat analyst estimates with earnings of $392 million, 43 cents per share fully diluted, and revenue of $2.75 billion. Management is projecting 2020 revenues of $12 billion and what it calls “solid, sustainable growth.”

Most people have never heard of STM because its brand name is hidden inside other companies’ products. Its chips go into sub-assemblies, programmed to collect data and communicate it over fixed or variable distances. Still, the company claims about 18,500 patents and filed for 590 more last year.

One example of what STM does is its new LoRA SOC. This enables long-range transmission of data for creating smart devices that are managed remotely. The company manufactures in both France and Italy, as well as Singapore, with assembly and testing facilities in Asia and Morocco.

Waiting for the Punch

I began writing about IoT technology in the early 2000s, calling it the “World of Always On.” I now prefer to call it “the Machine Internet,” and it’s a focus for growth in the new decade. Growth has been slowed by a lack of standards, by questions of security, and by privacy worries. STM works, with groups like the Zigbee Alliance on standards aimed at making microcontroller communication invisible.

Some of the technical hurdles are now being crossed and niches like self-driving cars are heating up. Analysts expect STM to earn $1.45 per share this year, compared with $1.14 per share last year. Zacks recently profiled it as “an incredible growth stock,”  because earnings estimates have been steadily rising.

The Bottom Line

The biggest risks for STM stock right now would be a manufacturing slowdown caused by the coronavirus and growing international tension slowing trade.

If that happens, bigger profits will be delayed, but only for a time. The productivity benefits from radio-controlled sensors are impossible to deny. STM also has over $2.7 billion in cash on the balance sheet to weather any storm, against long term debt of $1.9 billion. That’s a strong capital position for a manufacturer.

A big year for STM will also mean a big year for its customers, and thus for the global economy. Products that sense and manage their own condition can be fixed before they break. They’re managed remotely and increase productivity.

For people who grew up at the dawn of the computer age, what STM products allow may be indistinguishable from magic. But your grandkids take it for granted.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear,  available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.