STMicroelectronics (NYSE:STM) reports third-quarter results next week, and the company has already set the bar. It guided to revenue of about $3.70 billion, up about 16.2% from a year earlier, and a gross margin near 37.0%. STMicroelectronics is one of the 8 Best NYSE Stocks with Huge Upside Potential.
That growth rate is slower than the 26.0% it posted in the second quarter, which is the first surprise. The bigger question is whether profit will follow. STMicroelectronics sells chips used in cars and other electronics, and it now says AI data centers and satellite networks will drive its next leg up. Sales are clearly recovering, but earnings are lagging, and the stock’s price assumes they catch up.
Sales Have Snapped Back From a Long Slump
Growth was hard to find for years, with revenue falling about 9.8% a year over the past three years and growing only about 2.9% a year over five. Then second-quarter revenue rose 26.0% from a year earlier. Management said bookings were strong in every end market, and its embedded processing unit grew fastest, led by general-purpose microcontrollers.
That rebound matters because it shows demand coming back across the business, not in one corner of it. If you’re interested in high-growth chip stocks, we recently compiled a report on 12 High Growth Semiconductor Stocks to Buy Now.
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AI Data Centers and Satellites Add New Demand
Management has raised its targets for the new businesses. At the first-quarter report, STMicroelectronics expected data center revenue nicely above $500 million for 2026 and well above $1 billion for 2027. At the second-quarter report, it lifted those to above $1 billion for 2026 and well above $2 billion for 2027.
Chief Executive Jean-Marc Chery also told investors to expect growth to speed up in the fourth quarter, mainly from AI data center and low-earth-orbit satellite programs with customers already engaged. The company expects fourth-quarter revenue above $4 billion. That means growth slows in the third quarter before it picks up again. For investors looking to own the AI chip trade for years, our list of 10 Best AI Chip Stocks to Buy for the Long Term is worth a look.
Profit Is Still Trailing Sales
Profit is the weak spot, and the second-quarter operating margin shows it. It was 5.4% under U.S. GAAP, up from the first quarter but still thin next to that sales growth. The figure also carried $58 million of impairment, restructuring and phase-out costs from the company’s plan to reshape its factory footprint.
Cash flow looks better than earnings do. Free cash flow was positive at $75 million in the second quarter, against a negative $152 million a year earlier, even as the company kept spending heavily on factories. Charges for unused factory capacity also fell from the first quarter to the second, while management said demand kept rising in the quarter.
The third-quarter gross margin target already includes a drag from that unused capacity, so the company is guiding to progress even with the cost in. For shareholders, margin is what decides whether faster sales turn into earnings. A gross margin that lands near 37.0% would back the recovery story, and a miss would raise doubts about it.
What the Price Already Assumes
STMicroelectronics trades at about 34 times forward earnings, a multiple built on adjusted figures. The sector median is about 21.5 times, and the company’s own five-year average is about 22.8 times. Adjusted earnings matter here, because second-quarter net income was $291 million on an adjusted basis and $222 million under U.S. GAAP.
The price is betting that the recovery lifts earnings well beyond what the reported numbers show today. If you’re looking for cheaper growth ideas, check out 10 Undervalued Growth Stocks to Buy Now.
So profits are following sales, but only partly. Operating margin has risen from the first quarter, yet it remains thin next to the rebound, and a valuation this far above its history needs that gap to close. The report next week will show whether gross margin reaches that target and whether management still sees fourth-quarter revenue above $4 billion.
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This article is originally published at Insider Monkey.
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