Investor Essentials Daily

You need chips for everything these days

July 10, 2024

Semtech (SMTC) is at the forefront of digital transformation, benefiting from the increasing demand for semiconductors and connectivity solutions driven by technologies like AI, 5G, and IoT.

The company provides critical components for data centers, which contribute 27% of its revenue, and is well-positioned for growth in IoT and 5G markets.

Semtech’s acquisition of Sierra Wireless in 2023, despite initial concerns about overpayment, is expected to yield $40 million in operational synergies by the end of 2024.

With stabilizing demand and attractive valuations, Semtech holds promising potential for long-term investors.

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The digital transformation of our world continues at a relentless pace.

As technologies like artificial intelligence, 5G networks, and the Internet of Things become ever more integrated into our daily lives and industries, the demand for the underlying semiconductor components and connectivity solutions powering this infrastructure is soaring.

One company that has positioned itself at the center of these trends is Semtech (SMTC), a leading provider of chips, modules, and wireless technologies serving massive markets like data centers, communication networks, and industrial automation.

Semtech is well-positioned to be a long-term beneficiary of the above-mentioned secular growth trends.

One area already showing strength is data center buildouts and spending on cloud infrastructure. The company provides optical interconnect and power management solutions to many of the largest data center operators.

Currently, data center investments account for 27% of Semtech’s revenue. As digital transformation drives ever-increasing demand for cloud-based services, data center operators are expected to continue ramping capital expenditures, translating to ongoing semiconductor demand.

IoT is another major focus market for Semtech. The company’s LoRa long-range wireless technology has seen widespread adoption in applications like smart utility metering and industrial asset tracking.

IoT spending is projected to grow rapidly as more enterprises implement sensors and connectivity to optimize operations.

5G network rollouts present a significant opportunity as well. Each generation of 5G infrastructure requires more advanced RF content than the prior. Semtech is a supplier of RF chips and sees 5G buildouts as a multi-year catalyst.

Momentum is building as telecom carriers accelerate 5G deployments and launch new spectrum bands.

Semtech’s acquisition of Sierra Wireless in early 2023 for $1.2 billion also expanded its portfolio of cellular IoT modules and gateways targeting industrial and mobile applications.

However, the acquisition was viewed by the market as overpaying and resulted in sizable goodwill and asset impairment charges.

Fortunately, those write-downs are now in the past and priced into Semtech’s stock. The integration is progressing well and is expected to achieve $40 million in operational synergies by the end of 2024.

The acquisition of Sierra Wireless also provides meaningful cross-selling opportunities going forward.

While macroeconomic headwinds like high inflation initially weighed on Semtech, there are signs demand is stabilizing. The company expects mid-single-digit organic growth going forward as conditions gradually improve.

At current valuations of 15.5x Uniform P/E, Semtech appears attractively priced relative to its profitable growth potential over the coming years.

Semtech may reward long-term investors as key technology trends play out and its end markets strengthen in the periods ahead.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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