Is Semtech Still Fairly Priced After Recent IoT Partnership Buzz?

• Wondering if Semtech stock is really worth its current price? You are not alone. Valuation on this versatile semiconductor player is top of mind for many investors right now.
• Semtech’s share price has had its ups and downs lately, gaining 0.3% over the last week and 6.1% in the past month. Year-to-date it is up a healthy 16.0%.
• Recent headlines have spotlighted Semtech’s expanded partnerships in the IoT and networking space, which market watchers see as both a growth catalyst and a source of volatility. Additionally, industry-wide optimism about semiconductor demand has fueled further price moves, giving investors new reasons to reassess their outlook.
• According to our checks, Semtech scores just 1 out of 6 on our valuation scorecard, suggesting there may be more to the story under the surface. We will break down how different valuation models view Semtech’s stock. Plus, stick around for a smarter way to think about value at the end.

Semtech scores just 1/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Semtech Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model tries to estimate the true value of a company by projecting its future cash flows and discounting them back to today’s value. This method helps investors gauge whether a stock’s current price reflects its fundamental worth or is influenced by market sentiment.

For Semtech, the DCF analysis starts with its latest reported Free Cash Flow of $129.1 million. Analyst estimates indicate Free Cash Flow may reach $253.5 million by 2028. Projections beyond 2028 are extrapolated to reflect continued business expansion, leading to an estimated Free Cash Flow of $503.4 million by 2035. All figures are in US dollars.

Using this two-stage DCF approach, the intrinsic value of Semtech shares is estimated at $47.26. Compared to the current market price, this suggests that the stock is trading at a 52.4% premium. In other words, Semtech appears significantly overvalued based on its projected future cash flows.

Result: OVERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Semtech may be overvalued by 52.4%. Discover 928 undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Semtech.

Approach 2: Semtech Price vs Sales

For companies like Semtech, the Price-to-Sales (P/S) ratio is an especially useful valuation metric. This is because it focuses on revenue generation and provides insight into how much investors are willing to pay for each dollar of sales. For profitable semiconductor companies, sales can be a more reliable and comparable yardstick than earnings, which often fluctuate with investment cycles and industry trends.

Growth prospects and risk are key ingredients in figuring out what a “fair” P/S multiple should be. Fast-growing or less risky companies generally command higher multiples, while slower or riskier players tend to trade at a discount. Semtech currently trades at a P/S ratio of 6.5x, just below its peer average of 6.9x and well above the wider semiconductor industry average of 4.7x.

Simply Wall St’s proprietary Fair Ratio for Semtech is 6.4x. This fair ratio takes into account not only peer and industry trends, but also factors unique to Semtech, such as its projected sales growth, profit margin profile, market capitalization, and company-specific risks. Unlike a simple comparison with industry or peer averages, this approach adjusts for the nuances that often drive a company’s long-term value.

Semtech’s actual P/S ratio of 6.5x is almost identical to its Fair Ratio of 6.4x, suggesting that the stock is trading at about the “right” level based on this metric.

Result: ABOUT RIGHT

PS ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1441 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Semtech Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives, a smarter, story-driven approach for making investment decisions that ties your perspective on Semtech’s future directly to its numbers.

A Narrative is the investment story you build based on your expectations for Semtech’s growth, margins, and risks; it connects what you believe about the company to specific forecasts and, ultimately, your own estimate of fair value.

This approach is both powerful and accessible. Through the Simply Wall St Community page, anyone can create or browse Narratives, making this an easy tool for millions of investors to take their analysis further.

Narratives empower you to compare your fair value against the current price and decide for yourself when Semtech is a buy or a sell. They also update automatically with the latest news and earnings releases, keeping your view relevant as events unfold.

For example, some investors might see Semtech’s exposure to booming data centers and IoT as supporting an optimistic price target of $80 per share, while others, focusing on margin uncertainty and tech risks, might set a more cautious target near $53. Both views are informed by distinct Narratives, each leading to different investment decisions.

Do you think there's more to the story for Semtech? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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