Why Semtech (SMTC) Stock Is Falling Today

Kayode Omotosho /
2024/01/03 1:41 pm EST

What Happened:

Shares of semiconductor company Semtech (NASDAQ:SMTC) fell 5.2% in the morning session after stocks experienced a second consecutive day of decline, accompanied by an increase in yields. The 10-year Treasury yield rose past the 4% mark for a brief moment. The 2-year yield rose to 4.38%. This may be a sign that there is a hint of uncertainty and questions about whether the broader market is positioned too optimistically or whether the market has "gotten ahead of itself". Other than this, there is nothing specific to directly explain the downward move. 

As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory are not macro prognosticators. Instead, we think there are opportunities to pick market-beating stocks in any macro backdrop. We remain steadfast in our view that it's best to own high-quality companies with margins of safety over the long term in any market.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Semtech? Access our full analysis report here, it's free.

What is the market telling us:

Semtech's shares are somewhat volatile and over the last year have had 28 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The previous big move we wrote about was 28 days ago, when the stock gained 13.8% on the news that 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 2023, 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.

At $20.51 per share Semtech is trading 41% 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 $475.76.

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