Bank of America is doubling down on a lesser-known chip stock — and gives it 50% upside

Published Tue, Apr 18 20237:16 PM EDT

Semiconductor stocks are on a roll this year after a difficult 2022. The iShares Semiconductor ETF , which tracks the sector, is up about 22% in the year to date — nearly three times the return of the S & P 500 this year. Nvidia has undoubtedly been one of the sector's biggest winners this year, but Bank of America is doubling down on a lesser-known chip stock. In a note on April 11, the investment bank stuck to its "buy" rating on chip maker STMicroelectronics with an unchanged price target of 71 euros ($77.70) on the firm's French-listed shares and $78 for the firm's U.S.-listed shares — which implies potential upside of more than 50% for the stock. That's significantly higher than the average potential upside of 16.1% given by analysts covering the stock, according to FactSet data. Bank of America described the firm as a "top pick" among European auto semiconductors and said the stock remains cheaper than its peers. "In our view, the stock trades at a discount to [European and U.S] peers for three reasons: 1) poor track record, 2) high Apple concentration and 3) high capital intensity/low cash returns," said Bank of America's analysts, led by Didier Scemama. The bank said it believes concerns about the company's poor track record and high Apple concentration are "likely to fade over the course of the next 12-18 months" as it improves gross margins and operating margins. Apple's share of the firm's revenue is also likely to drop to around 10% by end-2024, the bank added. Among other products, STMicroelectronics produces microcontrollers, which are widely used in a large variety of automotive applications, such as position sensors, the control of windshield wipers, power steering systems and advanced driver assistance systems. STMicroelectronics is the only company producing 300mm wafers in Europe, the analysts said, unlike most of its direct competitors, which outsource production to Taiwanese foundries such as Taiwan Semiconductor Manufacturing Company and United Microelectronics Corporation . "We think the company is in a unique position to gain incremental share in autos and industrial [microcontrollers] with customers looking to de-risk their supply chain," the analysts said. While they acknowledged that share gains will be "slow," the analysts expect STMicroelectronics will benefit disproportionately from the growing onshoring trend of diversification from suppliers reliant on Taiwan. "We think that concerns over the size of its Apple exposure and related loss of a major contract are baked in at the current price. Yet we estimate that the company will outgrow its peers in terms of both sales and [earnings before interest, taxes, depreciation, and amortization] over the next two years. Hence, we would expect a gradual rerating once we have clarity over the Apple relationship and the market better appreciates the growth prospects of the company," the analysts said. — CNBC's Michael Bloom contributed to this report.