Semtech Corporation's (NASDAQ:SMTC) Price Is Right But Growth Is Lacking After Shares Rocket 41%
Semtech Corporation (NASDAQ:SMTC) shareholders are no doubt pleased to see that the share price has bounced 41% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.
Although its price has surged higher, Semtech may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.7x, considering almost half of all companies in the Semiconductor industry in the United States have P/S ratios greater than 4.2x and even P/S higher than 9x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.
View our latest analysis for Semtech
How Has Semtech Performed Recently?
Recent times haven't been great for Semtech as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Semtech.
Do Revenue Forecasts Match The Low P/S Ratio?
Semtech's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 8.2% last year. This was backed up an excellent period prior to see revenue up by 48% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 2.5% over the next year. Meanwhile, the rest of the industry is forecast to expand by 39%, which is noticeably more attractive.
In light of this, it's understandable that Semtech's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
What We Can Learn From Semtech's P/S?
Shares in Semtech have risen appreciably however, its P/S is still subdued. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Semtech maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.
There are also other vital risk factors to consider and we've discovered 3 warning signs for Semtech (1 can't be ignored!) that you should be aware of before investing here.
If these risks are making you reconsider your opinion on Semtech, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.
