Some Confidence Is Lacking In Semtech Corporation (NASDAQ:SMTC) As Shares Slide 43%

Semtech Corporation (NASDAQ:SMTC) shareholders won't be pleased to see that the share price has had a very rough month, dropping 43% and undoing the prior period's positive performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 79%, which is great even in a bull market.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Semtech's P/S ratio of 3.8x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in the United States is also close to 4.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Semtech

How Has Semtech Performed Recently?

With revenue growth that's inferior to most other companies of late, Semtech has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Want the full picture on analyst estimates for the company? Then our free report on Semtech will help you uncover what's on the horizon.

How Is Semtech's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Semtech's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Fortunately, a few good years before that means that it was still able to grow revenue by 19% in total over the last three years. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, revenue is anticipated to climb by 20% during the coming year according to the twelve analysts following the company. With the industry predicted to deliver 38% growth, the company is positioned for a weaker revenue result.

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. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

With its share price dropping off a cliff, the P/S for Semtech looks to be in line with the rest of the Semiconductor industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Semtech (1 doesn't sit too well with us!) that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.