Tuesday, May 27, 2008
[Originally for Sramana Mitra's site]
I value ST Microelectronics at just under $15 per share. This is about 30% more than its current value. Its strengths include its broad portfolio, its position in the strengthening European block and its resultant wireless business outlook. The operating constraints caused by STM’s geopolitical ties are growth deterrents. Its commitment to the IDM model can make it tough to compete effectively against the crop of nimble fabless companies.
While STM has been in the news recently for its wireless moves, its product portfolio extends from consumer goods to industrial automation solutions. Its IMS business will remain a steady revenue source. Its MEMS products are an important part of the highly successful Nintendo Wii. The company continues to supply advanced analog components and energy management solutions for various industrial applications. The IMS also offers growth drivers that STM is yet to address aggressively. The analog market has a TAM of around $37 billion that STM can look at once it has its wireless business logistics worked out.
Its wireless business, it appears to me, is increasingly becoming Europe and Nokia-centric. The company’s success and growth in wireless relies to a large extent on how it can bootstrap itself to Nokia’s success. While it has a good rapport with the Finnish-handset company, it cannot afford complacency. With Broadcom pushing as well to grab TI’s share as well through an aggressive product and pricing strategy, STM’s task is cut out. It has to anticipate and meet Nokia’s needs, being ready in the process to take further margin cuts.
The IDM model and Europe's labor laws will keep STM from reaping the full benefits of its wireless outlook. Its gross margins are below industry average at a low 35%. While the company is taking great efforts to become less capital-intensive, I am not sure how much more manufacturing efficiency the company can eke out. The divesting and merger activities to gain scale will provide some reprieve though.
In conclusion, I think STM is well-positioned in the wireless market to displace TI from its second position. But since this will not come at increased efficiency and margins, it does not increase the company’s value dramatically. While I am both curious and enthusiastic about STM’s wireless future, I will shy away from investing in the company just given the baggage it appears to come with.