Semtech Corporation's (NASDAQ:SMTC) Shares Climb 34% But Its Business Is Yet to Catch Up

Semtech Corporation (NASDAQ:SMTC) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 11% in the last twelve months.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Semtech's P/S ratio of 3.3x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in the United States is also close to 3.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

We've discovered 2 warning signs about Semtech. View them for free.

Check out our latest analysis for Semtech

What Does Semtech's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Semtech has been relatively sluggish. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Semtech.

Is There Some Revenue Growth Forecasted For Semtech?

In order to justify its P/S ratio, Semtech would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.7% last year. Revenue has also lifted 23% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 9.6% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 23% each year, which is noticeably more attractive.

With this in mind, we find it intriguing that Semtech's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What Does Semtech's P/S Mean For Investors?

Semtech's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given that Semtech's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Semtech that you should be aware of.

If you're unsure about the strength of Semtech's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.