Morgan Stanley: Gross margin recovery path is clear, reiterates “Overweight” rating on STMicroelectronics (STM.US)

According to Zhittong Finance APP, Morgan Stanley released a report stating that STMicroelectronics (STM.US) delivered overall third-quarter results in line with expectations. Although earnings per share (EPS) were slightly below consensus, the fourth-quarter guidance met forecasts, temporarily easing market concerns. As the structural improvement in gross margin from wafer fab restructuring gradually materializes, Morgan Stanley maintains its "Overweight" rating on STMicroelectronics and sets a target price of 65 euros.

The report noted that after the significant volatility in profit margins last quarter, the "stability" shown in this financial report is itself a positive signal. Third-quarter sales and gross margin (37.3%) basically met expectations. The fourth-quarter sales guidance is $4.15 billion and the gross margin guidance is 39%, both in line with expectations (with gross margin guidance 86 basis points above market consensus). Although the third-quarter EPS was 10% below market consensus, the market’s main focus—the fourth-quarter guidance—was delivered as expected, allowing the debate on profit margins to remain anchored to the track of structural improvement.

The main points from Morgan Stanley are as follows:

No change in the margin improvement path; target may be achieved by mid-2028

Management reiterated the gross margin target of 44%-46% and stressed that the restructuring of manufacturing footprint will bring over 400 basis points of structural gross margin improvement. Although the third-quarter gross margin still absorbed about 60 basis points of idle capacity costs and 40 basis points of non-recurring transfer costs, management expects these costs to largely disappear by the second half of 2027. Morgan Stanley believes that, considering the time customers need to transition away from legacy products, the target may be achieved closer to mid-2028 rather than the end of 2027.

Data center and LEO business drive growth, consumer electronics remains weak

Performance varied by end market: AI data centers (AI DC) continued to lead, with related revenue estimated at around $1.3 billion in 2026 and significantly above $2 billion in 2027, mainly driven by silicon photonics, electronic ICs, microcontrollers, and power solutions. The low earth orbit satellite (LEO) business is capacity constrained; 2027 revenue is expected to be at least on par with 2026, possibly higher. The industrial segment demonstrates the clearest cyclical resilience, with fourth-quarter year-on-year growth guidance of 40%-50%. In contrast, personal electronics performed weakly and is expected to remain subdued in 2027, possibly due to smartphone DRAM shortages and lack of new content increments.

Seasonality will change in 2027; EPS forecasts for 2027/28 revised upward

Management indicated that, as revenue structure shifts toward data center and LEO satellite businesses, seasonality in 2027 will diverge from historical patterns. More detailed guidance will be provided in January 2027 (when fourth-quarter financial results are released). While expectations for total 2027 sales remain roughly unchanged at about $18 billion, Morgan Stanley has raised its 2027 and 2028 EPS forecasts by 11% and 2% respectively, to $3.21 and $4.10, based on better-than-expected margin progress.