Semtech Stock Leads Industrial Semiconductors' Comeback

Key Points

• Semtech is a leading industrial semiconductor company well-positioned for broad-based demand increases in 2025.
• The company's strength and improving cash flow allowed for debt reduction and balance sheet improvement.
• Analysts are lifting their targets and leading this market back to its all-time highs. 

The emerging story from the industrial semiconductor market is that these companies are exiting a global inventory correction, and Semtech NASDAQ: SMTC is among the best positioned. Its results prove its market-leading position by resuming growth in Q3, at least a quarter sooner than others are expected to do, and the guidance compounds this. 

The guidance is robust, forecasting sequential acceleration to 30% year-over-year (YoY) growth in Q4, but it may be cautious due to the trends. Improving demand in all end markets, including automotive, is driving the outlook and tailwinds have only begun to blow. The outlook for FOMC policy reduction has tempered from its peaks but remains favorable to global business activity in 2025. 

Semtech Surges on Beat-and-Raise Quarter

Semtech had a solid quarter with revenue of $236.8 million, growing by 18% compared to 2023. The top line outpaced MarketBeat’s reported consensus by 200 basis points on broad-based strength centered on data centers. The data center segment grew by 58% sequentially on increasing demand tied to AI. AI is viewed as a generational opportunity for the business and is expected to drive future results. The data center business is worth 18.1% of revenue in Q3 and is expected to increase in contribution over the coming quarters. 

The margin news is more impressive, with the gross and operating margins widening by triple digits. The gross margin expanded by 200 basis points and the operating margin by 400 to drive leveraged results on the bottom line. The critical detail is that margin improvement was sufficient to drive profitability, exceed the consensus forecasts, and come with an expectation for strength to continue. The company’s adjusted EPS is up more than 1000% YoY, outpaced the consensus by 1300 basis points, and allowed for significant balance sheet improvement. 

Semtech produced a cash flow positive quarter and used the money to pay down some of its debt. Long-term debt is down 13% year-to-date and is expected to continue falling due to the guidance. Other balance sheet highlights include increased cash, steady assets, a reduced deficit, and liabilities falling under 1x assets. The deficit, a key indicator of shareholder value, was cut in half since the first of the year. The company might erase its deficit within the next quarter or two and produce GAAP profits with these trends. 

Analysts Spark a Bull Run in Semtech Shares

The analysts sparked a bull run in Semtech shares, issuing a collectively bullish response. MarketBeat tracked eight revisions within the first 24 hours of the Q3 release, and all increased their price targets. The consensus lags the price action due to the 20% rise in share prices but is also rising, up 80% in the last 12 months, and likely to continue increasing given the outlook. The high-end range is $85, which puts the stock within an easy move of hitting an all-time high. 

The price action following the release is very bullish, rising sharply by 20% to move above a critical inflection point. The inflection point is near the middle of a long-term trading range and a point of past support and resistance. The strong move above this level signals a shift in market sentiment, likely resulting in a sustained rally. However, the short interest is relatively high, nearly 10%, and a factor in the move. Short covering will likely aid the updraft in the price action, but there is a risk that short sellers will begin to reposition at a higher level and cap gains. The likely targets for technical resistance are near $65, $73, and $91.