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Investing.com -- TD (TSX:TD) Cowen downgraded STMicroelectronics (NYSE:STM) stock to Hold, citing increased cyclical headwinds in the semiconductor industry amid downstream inventory pressures. The firm also cut its price target to $25 from $32.

The company's shares fell more than 2% Monday. 

STMicroelectronics, known for its leadership in power semiconductors and microcontroller units, benefits from a strong manufacturing network. However, TD Cowen analysts believe that the company's near-term financial performance is likely to be subdued due to inventory pressures and less favorable demand in the automotive and industrial sectors, where STMicroelectronics has significant leverage.

Despite STMicroelectronics' strategic shift over the past decade towards markets with longer-term customer relationships, such as automotive and industrial, the semiconductor group as a whole has yet to show signs of a demand rebound. The firm points to Purchasing Managers' Index (PMI) data and commentary from the company and its peers, which do not conclusively indicate improvements in these sectors.

“Acknowledging that our downgrade is late, we struggle to see sentiment turning near term to drive valuation higher, and we don't see numbers inflecting near-term either,” TD Cowen analysts said in the note.

The analysts also highlight STMicroelectronics' inventory situation, which appears less favorable compared to its peers. With approximately two months of excess inventory in the channel, compared to some competitors who have completed their inventory rebalancing, TD Cowen sees this as an additional obstacle for STMicroelectronics to overcome before it can benefit from a potential market demand resurgence.

“We believe this places STMicro towards the back of the line on the list of broad-based semis stocks likely to outperform when demand improves,” analysts led by Joshua Buchalte noted.

Overall, the firm anticipates that 2025 will likely be another challenging year for STMicroelectronics, following a projected 23% downturn in 2024.

With limited internal measures available to counteract the impact on margins, the analysts foresee operating margins falling below 10%. They note that any improvement is contingent upon a return of demand.

“Cost savings should help longer term, but we believe are unlikely to provide enough cushion to margins/EPS near term,” analysts added.

As a result, TD Cowen has lowered its first quarter 2025 and full-year 2025/2026 estimates for STMicroelectronics, predicting weaker results due to the prolonged downturn in the automotive and industrial sectors, as well as the ongoing correction of channel inventory.

The bank expects first-quarter 2025 revenue to decrease by 20% quarter-over-quarter and forecasts a revenue decline of 7% for the full year of 2025, with gross margins below the Street's expectations for both periods.

While acknowledging STMicroelectronics as a long-term technology leader, TD Cowen suggests that the growth and margin challenges over the next 12 months make it difficult to advocate for the stock's upside potential.

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