Tech

Intel and STM, Double Stock Market Crash and Class Action on US Group

US stock almost halved in a month, Franco-Italian stock down 31.5%. Two law firms also open the file on the European multinational

by Antonella Olivieri

13 August 2024

4' min read

Key points

The Intel case
The specificity of STMicroelectronics
Chip supply and demand
Investments confirmed

4' min read

Since 25 July, when it announced its half-year results, but above all revised its estimates for the full year, STM has lost more than €10 a share, falling from €37, which it has never recovered, even below the current €27. Forecasts, which turned out to be wrong, on the recovery in demand for microchips at the base of the sharp correction in the guidance, the second in a row this year, of revenues for the whole of 2024, which from the almost $17 billion mentioned at the beginning of the year (in any case lower than the $17.29 billion of 2023), and from the indications of $14-15 billion lowered in April, are now seen gliding in the range of $13.2-13.7 billion. The stock market was taken aback and in the announcement session the share price dropped almost 14%.

This is not the first time this has happened. In this very particular sector, prices adjust quickly to the indications coming from companies. All the more so when, as has happened recently, the surprises are not positive.

The Intel case

The latest resounding case is that of Intel, which at the beginning of the month declared 17,500 redundancies (equal to 15% of the workforce), the suspension of the dividend, and cuts in operating costs and capital expenditures amounting to more than USD 10 billion. Thumbs down from the market that on 2 August knocked the stock down by 26%, sending 32 billion capitalisation up in smoke in a single session.

Intel has specific problems. The news that seven years ago the American company withdrew from participating in the capital of Open Ai because it did not believe in the potential of artificial intelligence, a terrain on which it has slipped even today, attracting criticism for not having products suitable for application in this sector. And since trouble never comes alone, last Wednesday the Construction Laborers Pension Trust of Greater St. Louis filed a class-action lawsuit against the US microchip giant, accusing it of helping to inflate the share price with previously misleading indications. Needless to say, the billion-dollar investment to build a plant in Europe, which was talked and read about for months, has disappeared from the radar.

The specificity of STMicroelectronics

STM does not operate in the same segment. Intel has different products (especially for computing, microprocessors for PCs) and different target markets. The French-Italian multinational, on the other hand, churns out sensors, microcontrollers and power devices that serve to interact with the outside world: 40% of its turnover is in the automotive sector, 30% in the industrial sector, and 20% in telephony. However, the threat of a class action lawsuit also hangs over STM. At least two American law firms (STM is also listed in New York) have put the group in their sights for the same reason - misleading indications - after the share price slump on the stock exchange.

To hear analysts and industry experts tell it, the context in which the growth blunder that led to the abrupt downgrading of expectations matured is that of one of the most severe cycle reversals since 2009, in a situation where the pandemic and then the exit from Covid altered market dynamics and blurred market visibility.

While 'normal' growth for the industry is 7%-8%-9% per year, STM experienced exceptional revenue growth of 25% between 2021 and 2022 and then 26%, followed by +7% in 2023. This year, it is backtracking in the order of 22%, from USD 17.29 billion in 2023 to USD 13.5 billion in the middle of the indicated range.

Chip supply and demand

What happened was that between the end of 2020 and the middle of 2022, demand for chips was very high, so high that not even the resulting price increase was able to discourage it. The fear of running out of chips and having to slow down or stop production, as happened in the automotive sector, prompted customers to replenish stocks in excess of what turned out to be real needs. But microchip manufacturers, unable to fulfil the avalanche of orders without accumulating delays, asked customers - exceptionally - to commit to purchase irrevocably by reserving the 'goods' even a year or more in advance. The result was that while companies like STM were running at full speed, the distribution channel became clogged with overstocking. Manufacturers had no early warning signals because orders could not be cancelled and by the time they realised the situation it was already too late. Those who rely on foundries (contract manufacturers such as the Taiwanese giant Tsmc) have more flexibility, those who tend to do almost everything in-house such as STM, which is a vertically integrated group, pay the price in these cases.

Less revenue means more under-utilisation charges and less earnings: compared to the $3.8 billion less revenue expected this year, operating profit will fall by $2.9 billion.

Confirmed Investments

However, STM has not cancelled strategic investments, financed with public funds under the EU chips act in Catania and Crolles, because it is convinced that the long-term trends in car electrification, digitalisation and the drive for energy savings are still relevant. Nor has it reported any redundancies, limiting itself to a temporary hiring freeze.

The stock, which lost 31.5% in one month (from 10 July to 9 August), now has a p/e of 20 times on 2024 and 13 times on 2025, at a discount to the most closely comparable stocks, which average 28 times on 2024. Intel - which closed the first two half-years of the year in the red and almost halved (-43.47%) its stock market value within a month - has a 2024 p/e of 58 times and a price/earnings ratio on 2025 of 17 times.

Antonella Olivieriinviato
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Luogo: Milano
Lingue parlate: inglese, tedesco, olandese (familiare), comprensione di testi scritti in francese, spagnolo e portoghese
Argomenti: finanza corporate, M&A
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