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Why STMicroelectronics (NYSE:STM) is an Underrated AI Stock
Stock Analysis & Ideas

Why STMicroelectronics (NYSE:STM) is an Underrated AI Stock

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While investors continue chasing the most compelling direct artificial intelligence-based opportunities, STMicroelectronics offers a tangential but still relevant investment. Therefore, STM stock deserves a closer look.

Setting aside broader economic concerns, investors largely remain focused on artificial intelligence (AI) and its numerous potential applications. However, semiconductor firm STMicroelectronics (NYSE:STM) deserves consideration as an underrated but arguably more reliable AI play. Essentially, the enterprise – commonly referred to as ST – represents the stagehand of the AI revolution. I am bullish on STM stock.

AI is Here, Whether We’re Ready or Not

As a big-picture narrative, TipRanks reporter Michael Marcus may have said it the best, stating, “AI is here, whether we’re ready or not.” While tremendous buzz surrounded the launch of chatbot ChatGPT, Marcus notes that this development represents “only the tip of a much larger iceberg.” Those that continue to ignore the ongoing acceleration of digital technologies stand to miss out on massive returns.

Further, the AI sector has evolved to the point where investors have many choices depending on their particular risk-tolerance levels. Still, for those jittery about sharp losses, betting on direct-play AI enterprises carries the not-unrealistic possibility of total catastrophe. To alleviate such concerns while still betting on AI, STM stock offers a compelling alternative.

STM Stock Delivers Relevant Credibility

Look around the blogosphere, and on a relative basis, you’re not going to find too many folks hyping up Dutch multinational semiconductor manufacturer ST. At the same time, the core benefit undergirding STM stock centers on credibility. While many AI upstarts feature aspirational business models, ST commands a relevant, established operation.

Better yet, the company brings to the table attractive financial metrics that deserve closer inspection. True, it’s not the most exciting opportunity in AI. However, it will likely keep the ship afloat.

While AI enterprises inarguably represent one of the most profound opportunities in the market, no one knows how individual companies will pan out. With STM stock, this specific source of pensiveness doesn’t exist. Stated differently, as an established business, ST will likely keep moving higher, irrespective of AI’s ultimate trajectory.

Nevertheless, should machines consistently integrate into everyday functionalities, STM stock should symbolize a downwind beneficiary. According to the underlying company’s website, “ST has been actively involved in AI research for many years.” In addition, the enterprise developed tools that allow developers to “take advantage of AI techniques on ST microcontrollers and sensors.”

In particular, ST’s facilitated applications stand out for two major endeavors. First, AI protocols enable more efficient end-to-end solutions by moving much of the busy work of cloud infrastructures closer to the sources of action. With ST providing the various components associated with cloud-based operations, increased digitalization should boost STM stock.

Second, AI has become a key element of autonomous and autonomy-assisted driving systems. Indeed, with serious car accidents on the rise since the COVID-19 pandemic, AI for transportation safety will be a burgeoning subsegment. Here, ST delivers advanced sensors and microcontrollers for automotive applications. With these and other relevancies, STM appears a credible investment in the broader AI ecosystem.

Financials Provide Another Attractive Angle

Moving beyond the business fundamentals for STM stock, the underlying financials also provide confidence for prospective investors. In particular, ST offers strong growth. In the fourth quarter of 2022, ST posted revenue of $4.42 billion, up over 24% against the year-ago period. Based on a three-year average, ST’s revenue growth rate comes out to 19.1%, beating 68.6% of rivaling semiconductor firms.

Also, its three-year free cash flow (FCF) growth rate pings at 36.9%. In contrast, the sector median value sits at 6.55%. ST beats 75.3% of the competition regarding this metric.

On the profitability front, the company posted a net margin of 24.6% on a trailing-year basis. This stat ranks above 86.25% of enterprises in the semiconductor industry. As well, ST features a return on equity of 38.14%, reflecting a high-quality business.

Finally, the market prices STM stock at a forward multiple of 12.6, ranking better (lower) than 82.1% of its rivals. Quite simply, if the AI narrative doesn’t work out for whatever reason, ST would be a Buy solely on its financial resilience.

Is STM Stock a Buy, According to Analysts?

Turning to Wall Street, STM stock has a Moderate Buy consensus rating based on five Buys, one Hold, and one Sell rating. Further, the average STM stock price target is $61.20, implying 23.3% upside potential.

Also, on TipRanks, STM stock has a 9 out of 10 Smart Score rating. This indicates strong potential for the stock to outperform the broader market.

The Takeaway: Enjoy a Credible AI Trade with STM Stock

While there’s nothing wrong with betting on an aspirational AI-driven enterprise, such wagers present high risks. For a more realistic investment, STM stock arguably provides a better option. By manufacturing the components that AI specialists need, it receives indirect exposure to a burgeoning market while still providing an established operation for more conservative investors.

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