Semtech Stock’s Breakout Could Have Another Leg Higher

Key Points

• Semtech stock is breaking out of its previous range, but this may only begin another leg run higher. 
• The business fundamentals show Semtech's market share is still intact, and its market share in its niche is still dominant.
• Analysts see double-digit upside in their price target projections, and EPS predictions are there to back valuations.

Shares of Semtech Co. NASDAQ: SMTC had been stuck in limbo until recently. For the past two years, the stock struggled to break out of its $20 to $30 price channel. That was until the past quarterly earnings figures came on the scene, bringing Semtech shareholders a much-needed breakout to what is now 89% of the stock’s 52-week high price.

While other technology stocks, particularly semiconductors, like Nvidia Co. NASDAQ: NVDA, got the lion’s share of market attention during the past 12 months, stocks like Semtech offer a much better value proposition to catch up to the artificial intelligence hype. What comes next for the industry could continue bullish momentum, and Semtech may be near the top leaders.

In today’s economy, growth matters more than ever, so investors should pay attention to Wall Street’s expectations for Semtech’s future earnings per share (EPS) growth projections. Investors will find out why analysts have placed so much faith in the stock’s future upside using a few valuation metrics. However, before the nitty gritty details are broken down, here’s what’s pushing Semtech’s sector higher.

Understanding Semtech’s Role in the AI Breakout

Artificial intelligence relies heavily on data sources to implement machine learning models. Semtech’s main long-range, low-power communication methods for Internet of Things (IoT) devices make data collection more accessible so that these models can build on themselves.

The company’s analog and mixed-signal circuits expertise also helps optimize power efficiency and high-speed data processing for neural network models. Boiling it down to simple terms, Semtech’s technology helps AI have quicker and better digestion even when it takes larger chunks of data down its processing tube.

A story needs facts to be credible, so here are some of the biggest industry names picking Semtech as a reliable technology provider. Comcast Co. NASDAQ: CMCSA is one IoT customer. Apple Inc. NASDAQ: AAPL is one of Semtech’s consumer electronics customers, giving the company’s services another quality stamp.

The list of customers goes on, but investors get the point in adoption rates for Semtech's services. This adoption translates into an up to 80% market share in the passive optical network space today, leading analysts to become bullish on the stock despite the current economy. 

Semtech’s Growth Doesn’t Care About the Fed

Most of the market is hanging by the interest rate cut expectation thread, relying on the Federal Reserve (the Fed) to follow through with its proposal of interest rate cuts for this year. The initial timetable was set for March 2024, but according to the CME’s FedWatch tool, it now looks like September 2024 instead.

Having priced in these potential cuts, the market finds little reason to keep pushing higher, especially in today’s stagflation environment. Defined as low economic growth and high inflation, the U.S. economy pushed a revised GDP growth rate of only 1.3%. In comparison, inflation remained above 3% during the quarter.

Because of this, Semtech’s recent breakout has nothing to do with interest rate cuts and everything to do with the business’s future prospects. These prospects include an industry-leading EPS growth rate of up to 142% this year, even higher than Nvidia’s 20.3%.

Following this bullish outlook, analysts at Piper Sandler took things even further by setting a price target of up to $60 a share, calling for the stock to rally by as much as 56.6% from where it trades today. But analysts weren’t the only ones on Wall Street taking a liking to Semtech’s future.

The Vanguard Group, one of the largest owners in Semtech, decided to up its stake in the stock even further. As of May 2024, the asset manager pushed its ownership higher by 1.6% to bring its net investment to a dollar value of $232.5 million.

Semtech’s financials show a gross margin of 48.6% in the past 12 months, pushing higher to 49.5% as seen in the past quarter’s earnings results.

More importantly, free cash flow (operating cash flow minus capital expenditures) rose to $12.2 million in the past quarter, compared to a negative $12.4 million in the previous quarter and a deeper outflow of $24.5 million in the same quarter last year.