On Thursday, Goldman Sachs revised its rating for United Microelectronics Corp (2303:TT) (NYSE: UMC) stock, shifting from Neutral to Buy. The firm also increased the price target for UMC shares to NT$63.00, up from the previous target of NT$56.50.
The upgrade was influenced by a more favorable view of the company's structural profitability and its appealing valuation combined with dividend yield.
The semiconductor company recently reported a second-quarter gross margin (GM) of 35.2%, which was significantly higher than both the company's own guidance of 30% and the consensus estimates from Goldman Sachs and Bloomberg of 30.9% and 30.6%, respectively.
Additionally, United Microelectronics' guidance for the third-quarter GM is notably higher than the consensus, expected to remain robust in the mid-30% range, despite the onset of higher depreciation and growing cost pressures.
This positive performance comes as a surprise, especially considering the intense competition within the mature foundry industry and the potential for price deterioration due to oversupply, particularly from competitors in mainland China. Goldman Sachs had previously expected United Microelectronics to experience pressure on its gross margins under these conditions.
However, the firm's pricing strategy and optimization of its customer and product portfolios have begun to yield benefits. These efforts are steering the company towards businesses that contribute more to gross margins, resulting in a stronger-than-anticipated structural profitability outlook for both the short and long term.
This shift in strategy and focus on more margin-accretive businesses is a key factor in Goldman Sachs' upgraded rating and price target for United Microelectronics Corp.
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