Categories Analysis, Technology

Why investors should keep an eye on Semtech’s (SMTC) stock

While pricing is competitive, the decline in average selling price remains a concern

The impact of the virus outbreak on Semtech Corp. (NASDAQ: SMTC) has been relatively modest and the semiconductor technology firm is looking at a mixed year ahead, amid continuing softness in the smartphone market and stable demand from cloud service providers.

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An innovative portfolio and competitive pricing have helped Semtech maintain a stable customer base over the years. The company, which is part of a rapidly evolving industry with significant growth potential, particularly sees opportunities in the expanding bandwidth for high-speed data networks and the growing demand for electronic systems for new-generation mobile devices.

Tailwinds

The other favorable factors include the growing relevance of effective energy management both at the enterprise level and in households. It needs to be noted that the company depends on overseas suppliers for most of the production, which allows it to focus more on designing and development. On the product front, the popular Tri-Edge PAM4 chipset is finding many takers and the trend is expected to continue.

After a relatively challenging fiscal year, the Camarillo, California-based company bets on the three industry themes of ‘IoT for a Smarter Planet, Bandwidth Expansion, and Miniaturization for Mobility’ to drive growth. Being specialized in analog and mixed-signal semiconductors, Semtech typically remains unaffected by fluctuations in the digital semiconductor market.

Investing in SMTC

Market watchers overwhelmingly recommend buying the stock, with a price target of slightly above $60. One good thing is that the valuation is favorable and the stock has the potential to create shareholder value, despite the volatility. Given the positive factors, those who hold the stock might not consider selling it now.

There is stable demand for information technology solutions such as the LoRa technology offered by Semtech, thanks to the cloud migration wave set off by the shutdown. On the flip side, customers tend to cut back on capital spending and defer their investment plans, concerned about the deepening uncertainty. Stiff competition and its possible impact on sales, together with the decline in average selling prices, are the main headwinds as far as margin growth is concerned.

Moreover, the semiconductor industry is highly cyclical, which makes companies vulnerable to fluctuations in demand conditions. Since Semtech outsources the lion’s share of its production to manufacturing facilities outside the US, geopolitical issues like the US-China conflict might affect the business.

Surviving COVID

Nevertheless, the promising product pipeline and the management’s expansion strategy, combined with the relatively strong balance sheet, should help the company tide over the near-term challenges and emerge stronger from the COVID crisis. As of now, Semtech’s debt is sustainable and it maintains a healthy cash flow.    

Earnings

Earnings, adjusted for special items, moved up by one cent year-over-year to $0.35 per share in the April-quarter even as sales increased modestly to $133 million, aided by double-digit growth in new bookings. The results also topped analysts’ forecast. When the company unveils its second-quarter numbers on August 26, analysts will be looking for earnings of $0.40 per share on revenue of $140.3 million.

Semtech’s stock bounced back quickly from the COVID-induced selloff that sent it to a two-year low in early March, and stayed on the upward trajectory since then. Currently hovering near the peak, the stock has gained 27% in the past twelve months, all along outperforming the market.

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