Semtech(US:SMTC) Seeking Alphaยท2024-06-24 12:13Investment Thesis - The company has upgraded its rating from hold to buy due to increased confidence in industry recovery, supported by positive comments from peers and forward-looking booking data [4][9] - The previous concerns regarding elevated inventory impacting near-term growth have been addressed, with expectations of positive sequential growth moving forward [5][9] Financial Performance - Sequential growth decreased from 0.8% in Q2 2024 to 15.7% in Q3 2024 and 4% in Q4 2024, but the worst is believed to be over [5] - The IoT system sales backlog grew by 47% sequentially, with router bookings more than doubling both sequentially and annually, indicating a broad recovery across product families [5][6] - Channel inventories declined by 27% sequentially and 47% annually, suggesting normalization in inventory levels [5] Market Trends - Strong secular tailwinds, particularly from 5G adoption, are expected to drive growth, with significant increases in Module business bookings (22% sequential growth) and LoRa bookings (61% sequential growth) [5][6] - Demand for hyperscale data center applications has more than doubled compared to Q1 2024, driven by generative AI applications [6] Future Outlook - The company anticipates a return to normal business conditions, with expectations of 7% sequential growth for the remainder of FY25 and a total revenue year-over-year growth of 5% [7] - FY25 is expected to be the trough year, with growth acceleration projected for FY26 and FY27, reaching a peak of 15% year-over-year growth [7] - The target price for the company is set at approximately $48, based on FY27 numbers, reflecting increased confidence in long-term growth [7] Risks - The recent change in CEO may raise concerns about potential internal issues, although no changes to corporate strategy are expected [8] - The timing of recovery remains uncertain, particularly in the context of a high interest rate environment that may delay customer purchases [8]