$9.42
$48.19
bear $9.42
base $21.36
bull $48.19
margin of safety $11.00
market price* $136.73
WHAT THE BUSINESS IS. Semtech (Camarillo, California) designs analog, mixed-signal and wireless chips in three segments: Signal Integrity (optical and copper interconnect chips for data centers, such as FiberEdge, Tri-Edge, the CopperEdge active copper cable line and linear pluggable optics), Analog Mixed Signal and Wireless (LoRa long-range radio chips and circuit-protection parts), and IoT Systems and Connectivity (the routers, modules and cloud services that came with the $1.2 billion Sierra Wireless purchase in January 2023). Fiscal 2026 (year to January 2026) sales were $1,050 million. About 67% of sales ship to Asia-Pacific and 47% to China and Hong Kong, so US export rules are a live risk; the company itself is US-run. HOW WE MEASURE EARNINGS. We use owner earnings: operating cash flow with working-capital swings removed, minus stock compensation (a real cost here, $40-68 million a year) and minus the capital spending needed to stand still. Goodwill write-downs (about $850 million against the Sierra deal) are non-cash and are added back; the damage from that deal shows up instead in the dilution and debt it left behind. Owner earnings per share over the last ten fiscal years: 2017 $0.72, 2018 $1.05, 2019 $1.57, 2020 $0.72, 2021 $1.07, 2022 $2.15, 2023 $0.63, 2024 -$1.21, 2025 $0.47, 2026 $1.54. Because we value the business before its lenders, we add back cash interest (as high as $84 million in fiscal 2024, now near zero), giving pre-interest cash flow of $6 million in 2024, $106 million in 2025 and $152 million in 2026. The record is strongly cyclical: $145 million in 2022 fell to $52 million in 2023 and $6 million in 2024. Across ten years the median is about 12% of sales, which on fiscal 2026 sales is roughly $128 million, our starting anchor. WHAT HAS CHANGED. Sales have grown ten straight quarters. The first half of fiscal 2027 brought $633 million of sales (up 24%), the July quarter alone $342 million (up 33%) with data-center sales of about $100 million (up 91%) and LoRa about $58 million, and the company guided the October quarter to about $410 million. In August 2026 Semtech signed an agreement to sell the low-margin cellular module business to Compal Electronics for $62 million cash, expected to close by January 2027. Three corroborating quarters justify moving the normal level above the ten-year anchor, but not to the peak: a data-center boom with Semtech's own record of a 95% peak-to-trough fall in 2022-24 is not a permanent level. Growth check: pre-interest cash flow grew 44% in fiscal 2026. Our base case assumes about $215 million for fiscal 2027, a 41% rise, at or below last year's pace and supported by the first-half results and the order-based October-quarter outlook. We credit no further growth beyond that: Semtech's pre-acquisition record shows roughly flat cash flow per share from fiscal 2017 to 2023, and data-center share gains, new photonics products and LoRa adoption are hopes, not contracts. BASE CASE ($21.36 per share). About $215 million in fiscal 2027, $220 million in fiscal 2028 (management says secured supply may not cover fiscal 2028 demand, but there are no long contracts), $190 million in 2029, then a mid-cycle $160 million a year held for 30 years in total. A 65-year-old analog franchise with ongoing R&D can plausibly keep earning that long, and we assume nothing after. Business value about $2.33 billion; it owes net debt of about $297 million, leaving about $2.04 billion, or $21.36 a share on about 95 million shares. BEAR CASE ($9.42). The AI interconnect boom turns into the same kind of inventory bust Semtech went through in fiscal 2023-24: about $200 million this year, $120 million next, $60 million at the trough, then about $100 million a year (the fiscal 2025 level) through year 15, fading to zero by year 25 as data-center competition from Broadcom, Marvell and Credo and LoRa price pressure wear the products down. Business value about $1.19 billion, less $297 million of debt, leaves about $0.90 billion. Even here the zero-coupon 2030 notes can be repaid from cash on hand plus four years of cash flow. BULL CASE ($48.19). The company's own levers execute: capacity it has secured fills, and the business holds roughly the October-quarter run rate, about $330 million a year from fiscal 2028, for 40 years with no further growth. Business value about $4.89 billion, less debt, leaves about $4.59 billion. DEBT. At July 26, 2026 Semtech had $204 million of cash against $100.5 million of 1.625% convertible notes due November 2027 (conversion price $37.27; the company plans to repay the principal in cash using its revolving credit line) and $402.5 million of 0% convertible notes due October 2030 (conversion price $101.05). We count both as debt at face value and keep about $60 million of cash for operations. We do not credit the zero coupon as cheap money, because holders accepted no interest in exchange for the right to convert into shares, a cost borne through dilution. We add the $62 million module-sale proceeds and assume the module business contributed little to normal earnings. Net debt is about $297 million, roughly $3.10 a share. CHANGE SINCE OUR AUGUST 2026 ANALYSIS. We previously put the shares at $1 / $14.75 / $27. All three are higher now. Partly that is method: we now discount every company at the same 6% and express risk through the cases rather than a higher rate. Partly it is evidence: the July-quarter results, the October-quarter outlook and the signed module sale. Against that, stock compensation jumped to $26 million in the April quarter alone, and share count rose from 64 million in 2023 to about 95 million today, chiefly from swapping convertible debt for stock. MARGIN-OF-SAFETY PRICE. A 20% annual return requires roughly a 1.7x gain within three years. The base case supports about $12.50; the bear case of about $9.40 is less than half the base, so the range of outcomes is wide. The margin-of-safety price is $11. From $11 the bear case implies a loss of about 15%, while the base case implies roughly 25% a year over three years. WHAT WOULD MAKE THIS WRONG. To the upside, the data-center business proves durable rather than cyclical and holds well above $300 million of annual cash flow for many years. To the downside, export restrictions on China-bound shipments, a hyperscaler pause, or another costly acquisition like Sierra Wireless.