STMicroelectronics (STM) had a rough Thursday. The chipmaker reported second-quarter results that actually beat Wall Street expectations, but investors fixated on the soft third-quarter revenue outlook and sent the stock down nearly 18%.

The company, which supplies chips to Apple and Tesla, posted revenue of $3.49 billion, up 26% from a year ago and ahead of the $3.38 billion analysts were looking for. Adjusted earnings came in at 31 cents per share, beating the 27-cent estimate. Gross margin expanded to 34.8%, helped by lower unused-capacity charges and a better product mix. Operating margin improved sharply to 5.4% from negative territory a year earlier.

But the third-quarter forecast was the problem. STMicro expects revenue between $3.58 billion and $3.82 billion, with the midpoint of $3.70 billion below the $3.72 billion consensus. Gross margin is seen at about 37%, plus or minus 200 basis points. That's not terrible, but it wasn't enough to keep the stock from sliding.

Margins and Cash Flow Are Getting Better

Beyond the headline numbers, there were some bright spots. Net income hit $222 million, and operating income was $187 million. That operating income included $58 million in impairment and restructuring costs tied to manufacturing changes and the NXP MEMS sensor acquisition. Excluding those, adjusted operating income was $269 million.

Operating cash flow jumped to $502 million from $354 million a year earlier, and free cash flow turned positive at $75 million, compared with negative $152 million in the prior-year period. The company ended the quarter with a net cash position of $2.01 billion and total liquidity of $6.03 billion.

Segment Growth Was Broad-Based

All of STMicro's business lines grew. Analog, MEMS and Sensors revenue rose 26% to $1.43 billion. Embedded Processing jumped 35.5% to $1.15 billion. Power and Discrete grew a modest 3.7% to $464 million, while RF & Optical Communications climbed 32% to $445 million.

AI Data Center: The Big Story That Got Drowned Out

CEO Jean-Marc Chery tried to steer the conversation toward the future. He said revenue growth should accelerate in the fourth quarter, driven by customer programs in AI data centers and low-Earth-orbit satellite communications. Fourth-quarter revenue is expected to exceed $4 billion, which would push second-half growth above the typical 15% seasonal increase.

Chery also raised the company's AI data center revenue forecast significantly. STMicro now expects data center revenue to exceed $1 billion in 2026, up from a prior forecast of more than $500 million. If demand keeps up, the company sees that figure topping $2 billion in 2027, compared with its previous outlook of more than $1 billion.

CFO Lorenzo Grandi added that growth in 2027 will be fueled by customer programs and increasing demand for optical cable connectivity. Adoption of 800-gigabit and 1.6-terabit-per-second pluggable optics is accelerating.

Automotive, Industrial, and NVIDIA Collaboration

Chery noted that automotive revenue exceeded expectations in the second quarter, supported by application-specific integrated circuits, sensors, electric powertrain products, and advanced driver-assistance systems. Industrial demand also improved, driven by microcontrollers, analog products, and power-conversion solutions.

The company has been busy securing design wins across silicon photonics, optical connectivity, electronic integrated circuits, microcontrollers, and power solutions. Chery also highlighted an expanded collaboration with NVIDIA to support physical AI through microcontrollers, sensors, motor-control technologies, and security solutions.

Grandi said the cost-saving program is delivering expected benefits. Capital expenditures for 2026 are now expected at the high end of the $2.2 billion target, reflecting increased investment in growth areas like cloud optical interconnects.

What the Market Is Saying

Despite all the positive long-term signals, the market focused on the near-term disappointment. STMicro shares were down 17.77% at $54.07 at last check on Thursday. The message from investors was clear: a weak quarter ahead can drown out even the most exciting AI growth story.