Semtech (SMTC)

Semiconductor company Semtech (NASDAQ:SMTC) met Wall Street’s revenue expectations in Q4 CY2025, with sales up 9.3% year on year to $274.4 million. The company expects next quarter’s revenue to be around $283 million, coming in 3.4% above analysts’ estimates. Its non-GAAP profit of $0.44 per share was in line with analysts’ consensus estimates.

Company Overview

A public company since the late 1960s, Semtech (NASDAQ:SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and cloud connectivity.

Competitors offering analog and mixed-signal semiconductors for infrastructure and communications include Cisco (NASDAQ:CSCO), KORE Group (NYSE:KORE), and NXP Semiconductors (NASDAQ:NXPI).

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Semtech’s sales grew at a solid 12% compounded annual growth rate over the last five years. Its growth beat the average semiconductor company and shows its offerings resonate with customers. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. Semtech’s annualized revenue growth of 9.9% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Semtech grew its revenue by 9.3% year on year, and its $274.4 million of revenue was in line with Wall Street’s estimates. Although the company met estimates, this was its third consecutive quarter of decelerating growth, indicating a potential cyclical downturn. Company management is currently guiding for a 12.7% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 13.4% over the next 12 months. While this projection suggests its newer products and services will spur better top-line performance, it is still below the sector average.

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Semtech’s DIO came in at 133, which is 19 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Semtech’s unit economics are reasonably high for a semiconductor business, pointing to a lack of meaningful pricing pressure and its products’ solid competitive positioning. As you can see below, it averaged an impressive 51.9% gross margin over the last two years. Said differently, Semtech paid its suppliers $48.09 for every $100 in revenue.

In Q4, Semtech produced a 51.3% gross profit margin , marking a 1.5 percentage point decrease from 52.9% in the same quarter last year. Zooming out, however, Semtech’s full-year margin has been trending up over the past 12 months, increasing by 1.3 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Semtech has done a decent job managing its cost base over the last two years. The company has produced an average operating margin of 13.1%, higher than the broader semiconductor sector.

Analyzing the trend in its profitability, Semtech’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q4, Semtech generated an operating margin profit margin of 57%, up 48.6 percentage points year on year. The increase was solid, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Semtech’s flat EPS over the last five years was below its 12% annualized revenue growth. However, its operating margin actually improved during this time, telling us that non-fundamental factors such as interest expenses and taxes affected its ultimate earnings.

Diving into the nuances of Semtech’s earnings can give us a better understanding of its performance. A five-year view shows Semtech has diluted its shareholders, growing its share count by 40.1%. This has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q4, Semtech reported adjusted EPS of $0.44, up from $0.40 in the same quarter last year. This print beat analysts’ estimates by 2%. Over the next 12 months, Wall Street expects Semtech’s full-year EPS of $1.71 to grow 27.7%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Semtech has shown weak cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 11.3%, below what we’d expect for a semiconductor business.

Taking a step back, we can see that Semtech’s margin dropped by 7.6 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its relatively low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business.

Semtech’s free cash flow clocked in at $59.1 million in Q4, equivalent to a 21.5% margin. This result was good as its margin was 9.2 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Semtech’s five-year average ROIC was negative 2.1%, meaning management lost money while trying to expand the business. Its returns were among the worst in the semiconductor sector.

Semtech reported $195.2 million of cash and $491.2 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $232 million of EBITDA over the last 12 months, we view Semtech’s 1.3× net-debt-to-EBITDA ratio as safe. We also see its $36.1 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Semtech’s revenue guidance for next quarter beat analysts’ expectations. We were also happy its adjusted operating income outperformed Wall Street’s estimates. Overall, this print had some key positives. The market seemed to be hoping for more, and the stock traded down 3.4% to $86.11 immediately following the results.

Updated: March 16, 2026 at 4:27 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Semtech.

Semtech isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was solid over the last five years and is expected to accelerate over the next 12 months, its relatively low ROIC suggests management has struggled to find compelling investment opportunities. And while the company’s operating margin didn’t move over the last five years, the downside is its cash profitability fell over the last five years.

Semtech’s P/E ratio based on the next 12 months is 40.9x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $93.38 on the company (compared to the current share price of $86.11).