Why Are Semtech (SMTC) Shares Soaring Today

Max Juang /
2023/12/07 12:37 pm EST

What Happened:

Shares of semiconductor company Semtech (NASDAQ:SMTC) jumped 13.8% in the morning session after the company reported third quarter results, which blew past analysts' adjusted EBITDA and EPS expectations. Revenue was in line, with its infrastructure and high-end consumer segments outperforming expectations. On the other hand, its revenue guidance for the next quarter underwhelmed. The company noted stabilization in the market demand for the semiconductor business despite ongoing constraints in the hardware business and the effects of elevated channel inventories. 

On October 2nd 2023, Mark Lin became the company's Chief Financial Officer. With a net leverage ratio of 6.4x (indicating how many times the company's debt exceeds its earnings and cash flow), the CFO provided helpful insights relating to the highly leveraged balance sheet. He discussed the $250 million, 4% convertible note issued in October, emphasizing its benefits in increasing the mix of fixed to floating rate debt, eliminating scheduled principal payments, and reducing cash interest costs amid potential future interest rate changes. Given that Semtech continued to burn cash during the quarter, reducing the total near cash outlay will play a vital role in improving the health of the balance sheet and raising investors' conviction in the ability of the business to navigate the challenging high-interest rate environment. 

Overall, this was a mixed quarter for Semtech, with investors likely encouraged by the improved business updates provided by management and adjusted EBITDA and EPS beats in the just-reported quarter.

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What is the market telling us:

Semtech's shares are somewhat volatile and over the last year have had 26 moves greater than 5%. But moves this big are very rare even for Semtech and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The biggest move we wrote about over the last year was 6 months ago, when the stock gained 14.7% on the news that the company reported first-quarter results that beat analysts' revenue and earnings per share (EPS) estimates. Inventory levels improved significantly. On the other hand, there was some gross margin deterioration. Revenue guidance for the next quarter was below Consensus, while the EPS guidance was roughly inline. Management added that "we see signs of business stabilization...With an expanded highly differentiated IoT portfolio, combined with our best-in-class High Performance Analog portfolio, we are well positioned to emerge stronger from this current cycle". 

In addition, the company announced Paul Pickle as the new President and Chief Executive Officer to replace Mohan Maheswaran, who announced his retirement in March, 2023. Mr. Pickle has served as President and Chief Eexecutive Officer and member of the Board of Directors of Lantronix since April 2019. Under his leadership, Lantronix experienced remarkable growth, with revenue expanding approximately threefold and market capitalization doubling. 

Overall it was a mixed quarter for the company. However, the market responded positively to the news of the new leadership, as reflected in the positive sentiment after the earnings announcements.

Semtech is down 30.8% since the beginning of the year, and at $20.03 per share it is trading 42.3% below its 52-week high of $34.74 from February 2023. Investors who bought $1,000 worth of Semtech's shares 5 years ago would now be looking at an investment worth $428.26.

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