Semtech's Incoming CEO's Long-Term Model and Potential Divestures have Upside: Analyst

Needham analyst Quinn Bolton upgraded Semtech Corp SMTC from Hold to Buy and a $35 price target.

The analyst sees a potentially more significant upside to the shares over the long term. 

He believes weak end-market demand and inventory digestion in the IoT and telecom markets may result in volatility in near-term results. 

However, Thursday’s earnings call presents an opportunity for incoming CEO Paul Pickle to introduce a new long-term operating model with earnings power well above Street estimates and highlight potential divestiture opportunities to raise cash and pay down debt. 

His experience with Pickle at Microsemi gives him confidence in his ability to streamline SMTC’s operations.

From Needham’s 4th Annual Semiconductor and SemiCap 1x1 Investor Conference and recent earnings calls from Analog Devices, Inc ADI and Ambarella, Inc AMBA, the analyst said that inventory levels in many end markets remain elevated, end market demand remains soft globally, particularly in China, and product lead times continue to compress. 

These factors may continue to pressure Semtech’s near-term results, especially in its IoT (LoRa and Sierra Wireless), telecom (5G base station and PON), and mobile handset (protection and proximity sensor) segments. 

Accordingly, the analyst reduced his FY24 and FY25 revenue and adjusted EPS estimates.

Bolton said the management may consider divesting non-core assets to raise cash and pay down debt. 

The 4G/5G broadband module business of Sierra Wireless may be a candidate for divestiture, with the company’s protection and proximity sensor product lines as other potential candidates.

Roth MKM analyst Scott Searle reiterated Semtech with a Buy and a $56 price target.

The analyst views modest risk to 2Q24 results and the outlook around elevated cellular module channel inventory as inconsequential. Essentially, a U-shaped cellular recovery and depressed core-Semtech (semis) sales (down 50% from the year-ago period) should be offset mainly by aggressive cost-cutting measures.

 However, critical commentary will center around extending the runway for covenant compliance. 

Consequently, the stock will remain range-bound until covenant resolution but sees 2024 meaningful stock upside with $3.00+ EPS power.

Price Action: SMTC shares traded higher by 0.28% at $25.43 on the last check Wednesday.

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