Semtech (SMTC)

Semiconductor company Semtech (NASDAQ:SMTC) met Wall Street’s revenue expectations in Q4 CY2024, with sales up 30.1% year on year to $251 million. The company expects next quarter’s revenue to be around $250 million, close to analysts’ estimates. Its non-GAAP profit of $0.40 per share was 25.6% above 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. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Thankfully, Semtech’s 10.7% annualized revenue growth over the last five years was solid. 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 9.6% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Semtech’s year-on-year revenue growth of 30.1% was wonderful, and its $251 million of revenue was in line with Wall Street’s estimates. Company management is currently guiding for a 21.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 14% over the next 12 months, an improvement versus the last two years. This projection is admirable and suggests its newer products and services will catalyze better top-line performance.

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 126, which is 24 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 50% gross margin over the last two years. That means for every $100 in revenue, roughly $49.96 was left to spend on selling, marketing, R&D, and general administrative overhead.

Semtech produced a 52.9% gross profit margin in Q4, marking a 4.4 percentage point increase from 48.5% in the same quarter last year. Semtech’s full-year margin has also been trending up over the past 12 months, increasing by 2.6 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).

Although Semtech was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 50.3% over the last two years. Unprofitable semiconductor companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Analyzing the trend in its profitability, Semtech’s operating margin decreased by 7.1 percentage points 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. Semtech’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q4, Semtech generated an operating profit margin of 8.4%, up 329.8 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Semtech, its EPS declined by 11.5% annually over the last five years while its revenue grew by 10.7%. However, its operating margin actually expanded during this time, telling us that non-fundamental factors such as interest expenses and taxes affected its ultimate earnings.

We can take a deeper look into Semtech’s earnings to better understand the drivers of its performance. As we mentioned earlier, Semtech’s operating margin improved this quarter but declined by 7.1 percentage points over the last five years. Its share count also grew by 34.7%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q4, Semtech reported EPS at $0.40, up from negative $0.06 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Semtech’s full-year EPS of $0.83 to grow 103%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

While Semtech posted positive free cash flow this quarter, the broader story hasn’t been so clean. Semtech’s demanding reinvestments have consumed many resources over the last two years, contributing to an average free cash flow margin of negative 4.1%. This means it lit $4.10 of cash on fire for every $100 in revenue.

Taking a step back, we can see that Semtech’s margin dropped by 9 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 it’s already burning cash. 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 $30.9 million in Q4, equivalent to a 12.3% margin. This result was good as its margin was 6 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, causing temporary swings. Long-term trends carry greater meaning.

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 4.4%, meaning management lost money while trying to expand the business. Its returns were among the worst in the semiconductor sector.

Semtech reported $151.7 million of cash and $551.5 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 $198.2 million of EBITDA over the last 12 months, we view Semtech’s 2.0× net-debt-to-EBITDA ratio as safe. We also see its $87.81 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.

We were impressed by how significantly Semtech blew past analysts’ EPS expectations this quarter. We were also happy its adjusted operating income outperformed Wall Street’s estimates. On the other hand, its revenue was in line. Overall, we think this was still a solid quarter with some key areas of upside. The areas below expectations seem to be driving the move, and shares traded down 1.5% to $34.51 immediately after reporting.

Updated: May 21, 2025 at 10:24 PM EDT

Before investing in or passing on Semtech, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

We cheer for all companies solving complex technology issues, but in the case of Semtech, we’ll be cheering from the sidelines. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its relatively low ROIC suggests management has struggled to find compelling investment opportunities. And while the company’s gross margins are decent for a semiconductor business, the downside is its operating margins reveal poor profitability compared to other semiconductor companies.

Semtech’s P/E ratio based on the next 12 months is 22.8x. 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 stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $53.58 on the company (compared to the current share price of $38.44).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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