This Is The Bottom For Semtech
After correcting more than 30% from the recent highs it looks like the bottom is in for Semtech (NASDAQ: SMTC). Unlike other rallies in the market this week, this one is not aided by a high short interest so looks like the real thing. When we say the real thing we mean a reversal and rally that has legs. The Q4 report and guidance were not only good but great in that revenue is expected above the consensus and margins are widening. This sparked a round of analysts chatter that appears mixed at first glance but amounts to a consensus rating and target with at least 25% of upside for investors.
So far, five of the ten analysts covering Semtech have come out with commentary since the Q4 release. Three of them lowered their price targets and two of them raised theirs while all maintained a consensus firm Buy rating. The price targets range from $75 to $85 compared to the $83 Pricetargets.com consensus target which has been trending lower over the past 30 and 90-day periods. As for the institutions themselves, they hold more than 96% of this company including more than 4% purchased over the past year.
Semtech Has Strong Quarter, Guides Higher
Semtech had a good quarter driven by high demand for electronics and semiconductor solutions at all levels. The company’s power-saving solutions are in particularly high demand and are underpinning the business. The Q4 revenue came in at $190.6 million to cap off a record-setting year and grow by 15.7% over last year and beat the consensus. The revenue beat the consensus by 80 basis points, a small margin, but there is margin growth as well. The company reports a 300 basis point improvement in both GAAP and adjusted gross margin with smaller but no less important gains at the operating level. This left the adjusted EPS at $0.70 or a penny better than expected and up $0.58 from last year.
Turning to the guidance, the company is expecting to see strength continue in 2023 and guided above the consensus. Execs are expecting to see revenue of $195 million at the low end of the range compared to the consensus estimate of $192.5 million and margins are expected to remain steady if not grow. In our view, with global manufacturing at a near stand-still waiting for microchips and components that need microchips, there is considerable upside risk in the numbers. Easing supply-chain jam-ups could easily lead to a manufacturing boom in the 2nd half of the year and accelerate demand for Semtech products.
“For Q1, we expect gross margin to continue to expand reflecting the benefit of continued strength of our growth engines. In fiscal '23, we expect our gross margins to trend higher by 100 basis points to 200 basis points from a favorable return mix of our growth platforms,” said Emeka Chukwu, Semtech EVP and CFO.
The Technical Outlook: A Rebound In Semtech Is On
Price action in Semtech has been shooting higher for the last few days and gaining momentum in the wake of the Q4 results. The price action is indicative of a bottom and could lead the stock up to the $80 if resistance at the $72 level can be overcome. The $72 level is consistent with previous resistance and could cap gains in the near term. If price action can not get above the $72 level we expect to see this stock move sideways within a range if not move down to set a new low.
