From railroads to the internet to artificial intelligence (AI), game-changing new technology can create entirely new industries overnight and catapult companies into the stratosphere. Even the patina of exposure to these emerging technologies can be enough to move share prices. Semtech (NASDAQ:SMTC) recently experienced this phenomenon when an analyst reported that the company has “AI-related revenue ramping up.”
Despite the recent jump in price, SMTC stock still trades at a reasonable valuation, making it a compelling option for long-term GARP (growth at a reasonable price) investors.
The AI-led frenzy, along with an earnings report that showed improvements in revenues, was enough to catalyze SMTC stock up by over 25% in the past month. Animal spirits aside, the company is well-positioned for solid growth in next-gen technology markets.
Semtech’s Focus on Next-Gen Markets
Semtech is an established provider of high-performance semiconductors, IoT systems, and Cloud connectivity services. The company currently dominates the rapidly growing 10G Passive Optical Network (PON) market with 70-80% market share.
SMTC serves original equipment manufacturers and industrial end markets, selling its products directly and through independent sales representatives and distributors across Asia-Pacific, North America, and Europe.
The company recently completed the acquisition of Sierra Wireless in a transaction valued at approximately $1.2 billion. The deal will nearly double Semtech’s annual revenue and contribute an additional $100 million in recurring revenues from high-margin IoT Cloud services. Semtech anticipates this acquisition to boost its non-GAAP EPS immediately and foresees generating $40 million from operational synergies within a year to 18 months post-closure.
SMTC’s Recent Performance
Semtech recently reported Q4 financial results. Revenue of $192.9 million exceeded the consensus estimate of $190.72 million. However, adjusted earnings per share (EPS) of -$0.06 missed the Street’s consensus of -$0.04. For Fiscal 2024, Semtech reported net sales of $868.8 million and a diluted EPS of $0.14. The company’s cash balance stood at $128.6 million at the end of the year.
Management forecasts Q1 EPS in the range of -$0.04 to $0.04, compared to the consensus estimate of $0.02. It projects Q1 revenue of $200 million, with a deviation of $5 million, which is in line with the consensus forecast of $200.57 million.
What is the Forecast for SMTC?
SMTC stock has been trending up, climbing roughly 14% in the past six months. It now trades at the high end of its 52-week price range of $13.13-$30.84 and demonstrates ongoing positive price momentum, trading above the 20-day (25.11) and 50-day (22.94) moving averages. The stock looks to be relatively undervalued, with a P/S (price-to-sales) of 2.3x, sitting below the Technology sector average of 4.6x and the Semiconductor industry average of 9.8x.
Analysts following the company are bullish on SMTC stock. For example, Craig-Hallum analyst Anthony Stoss recently raised the price target on Semtech to $36 from $30 and kept a Buy rating on the shares. Stoss cited the company’s new AI products and the China PON market as top-line growth drivers.
Overall, Semtech is rated a Strong Buy based on Buy recommendations from nine Wall Street analysts in the past three months. The average SMTC stock price target of $38.31 implies 21.7% upside potential from current levels.
Semtech in Summary
The rise of next-gen technology markets has set the stage for companies like Semtech to ascend to new heights. With exposure to emerging technologies such as artificial intelligence, high-performance semiconductors, IoT systems, Cloud connectivity services, and 10G PON, Semtech is well-positioned for long-term revenue growth.
While the share price has made a significant leap in the past month, it is still trading at a reasonable valuation. SMTC stock is a compelling tech-centric option for GARP investors.
