Semtech Stock Looks Overpriced Compared To Intel Stock: We Believe The Gap Can Only Widen

We think that Semtech Corporation (NASDAQ:SMTC) currently is a better pick compared to Intel (NASDAQ:INTC). Semtech stock trades at about 8x trailing revenues, compared to around 3x for Intel. Does this gap in the companies’ valuations make sense? We believe so. While both the companies have benefited in the pandemic, with an overall increase in demand for their products, Intel has struggled due to delays in its next-generation chipsets, combined with gradually losing Apple as a client (Apple has shifted to in-house chipsets for their laptops). On the other hand, Semtech has seen strong revenue and EBIT growth, which reflects in its surging valuation multiples. However, there is more to the comparison, which still makes Semtech a better bet than Intel at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Semtech vs Intel: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Semtech Is The Clear Winner On Revenue Growth

With Semtech’s fiscal year ending in January, Semtech’s ongoing FY is 2022 while Intel’s is 2021. If compared on the basis of the past two  years, Semtech trumps Intel in revenue growth. Semtech’s revenue jumped from $547.5 million in FY 2020 to $632.8 million over the past 12 months (a jump of 15%). On a comparable basis, Intel’s revenue has risen from $72 billion to $77.6 billion (a rise of just under 8%), nearly half the growth as that in Semtech’s revenues. Further, for the most recent quarter (Q2 ’22 for Semtech and Q2 ’21 for Intel), Semtech’s revenues jumped 28.4% YoY, while Intel, in fact, saw a drop of 0.5%.

While Intel is a much larger company, with more than 100x the revenue of that of Semtech, Semtech’s significantly stronger revenue growth makes it a better bet.

2. Semtech The Winner Again On Margins

Semtech’s EBIT margins rose from 7.6% in FY 2020 to 13% on an LTM basis. In comparison, Intel has seen its margins drop, going from 32.8% in FY 2019 to 29.1% over the last four quarters. While the dent in Intel’s revenues has dripped down to its margins, Semtech on the other hand, has been seeing consistent EBIT margin growth in line with the jump in revenues.

The Net of It All

While Intel’s revenue and margins stand multiples higher than that of Semtech, the latter has seen stellar growth in revenues and operating margins compared to Intel. Looking at the post-Covid recovery, Semtech has fared far better than Intel, with LTM revenues more than 15% higher than the pre-Covid fiscal year (FY 2020), while Intel’s LTM revenues stand only around 8% higher than those in FY 2019. While Semtech has a significantly higher P/EBIT ratio of 60x vs Intel’s 10x, and a higher P/S ratio at 8x vs Intel’s 3x, Semtech has the potential to keep riding its run, supported by strong financials. We think this gap in valuation could further widen over time. As such, we believe that Semtech is currently a better buying opportunity compared to Intel stock.