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Semtech SMTC shares have surged 93.8% year to date (YTD), outperforming the broader Zacks Computer and Technology sector’s return of 19.4% and Zacks Semi-Analog & Mixed industry's appreciation of 4%.
This phenomenal share price movement has been driven by solid performance across the Signal Integrity and Analog Mixed Signal & Wireless product lines. Strength in the LoRa technology was a plus.
In the first half of fiscal 2025, net sales were $421.5 million, down 11.3% from the first half of fiscal 2024 due to lower net sales from the industrial end market related to decreased sales volume and pricing pressures. However, net sales from the infrastructure end and high-end consumer end markets increased $27.6 million and $16 million, respectively.
SMTC’s Q3 Guidance Positive
For third-quarter fiscal 2025, SMTC expects net sales to be $233 million (+/- $5 million). The Zacks Consensus Estimate for the same is pegged at $232.59 million, indicating 15.78% growth from the figure reported in the year-ago quarter.
Semtech Corporation Price and Consensus
Semtech Corporation price-consensus-chart | Semtech Corporation Quote
Semtech expects net sales in the infrastructure end market to increase sequentially, driven by strong demand for data center applications. It expects industrial net sales to be slightly up.
The non-GAAP gross margin is expected to be 52% (+/- 50 bps). The non-GAAP operating margin is anticipated to be 17.2% (+/- 80 bps).
The non-GAAP-based earnings are expected to be 23 cents (+/- 3 cents) per share. The consensus mark for earnings is pegged at 24 cents per share.
Strong Partner Base Aids SMTC’s Prospects
The solid performance of SMTC’s product lines is considered a key catalyst in driving its shares, as well as the company’s rich partner base that includes the likes of NVIDIA NVDA, Ericsson ERIC and Nokia NOK.
The partnership with Skylo, a provider of satellite-based services, to integrate Non-Terrestrial Network capabilities into Semtech’s HL series LPWA modules, specifically the HL7810 and HL7812, enabling uninterrupted global connectivity, even in challenging conditions can be a major driver.
Semtech’s collaboration with Console Connect to expand its AirVantage Smart Connectivity service across the Asia-Pacific region, using Console Connect's IMSI service and partner roaming network, might be a plus in the near term.
The partnership with NVIDIA to implement low power, low latency active copper cables or ACCs for Blackwell racks and pods is a major positive in the upcoming quarters.
SMTC will continue with the qualification process with its Tri-Edge and FiberEdge wireless platforms for 5G advanced and are actively engaging with key partners like Ericsson and Nokia.
The growing demand for LoRa devices and LoRaWAN standards is likely to contribute to top-line growth in the near term.
Robust demand for SMTC’s passive optical network products will continue driving revenues in the fiscal third quarter.
Semtech’s recent acquisition of AptoVision, a privately held company that provides algorithms for transporting video over Internet protocol (IP), strengthens its position in the video over IP Pro AV space in the long term.
However, macroeconomic challenges, including persistent inflation and geo-political tensions, remain major concerns.
Zacks Rank and Valuation
Semtech’s shares are overvalued at this moment, as suggested by a Value Score of F.
SMTC stock is currently trading at a forward 12-month Price/Sales of 3.18X compared with the industry’s 7.74X.
SMTC currently carries a Zacks Rank #3 (Hold), implying that investors should wait for a better entry point. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Investment Research
China’s Yangtze Memory Technologies Co accomplished some breakthroughs in substituting ASML Holding NV and Lam Research Corporation chipmaking technology with domestic alternatives as U.S. sanctions take a toll on China’s artificial intelligence ambitions, Bloomberg cites TechInsights.
TechInsights analyst David Wei told Bloomberg in an interview that the memory maker leveraged gear from Advanced Micro-Fabrication Equipment Inc. China, Naura Technology Group and Piotech.
Geopolitical tensions have affected companies like YMTC and Huawei Technologies, as the U.S. restricted China’s access to advanced artificial intelligence chips and chipmaking machinery.
Though YMTC upgraded its “Xtacking” tech to help its NAND chip performance be at par with industry leaders Samsung Electronics Co , Bloomberg cited from a research note. Still, the absence of advanced technologies from companies such as ASML and NVIDIA Corp continued to bite chipmakers like YMTC in the form of a lower production yield.
Chinese hyperscalers such as Alibaba Group Holding Ltd – ADR voiced how the U.S. semiconductor embargo affected AI ambitions.
Meanwhile, the U.S. was in no mood to soften its stance against China as it collaborated with Japan to limit the export of chip technology to China.
Reports also indicated Nvidia AI chips were making their way into China via smuggling and other channels.
Photo: Shutterstock
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Investors are on edge in the lead-up to the Wednesday Federal Open Market Committee interest rate decision that is expected to deliver the first cut to the federal funds rate in over four years.
The market is divided on the magnitude of the anticipated rate cut. Traders are assigning a 59% probability to a 50-basis-point cut, while a 41% chance is placed on a more modest 25-basis-point reduction. The size of the rate cut is crucial as it could trigger significant market reactions.
Should the Fed opt for a 50-basis-point cut, it may be perceived as an acknowledgment that interest rates are overly restrictive. This could lead to increased expectations for further rate cuts in the coming months, potentially fueling risk sentiment and driving stock prices higher.
Conversely, a 25-basis-point cut might disappoint investors who are betting on a more aggressive measure.
Since the start of 2022, the S&P 500, tracked by the SPDR S&P 500 ETF Trust , has experienced an average move of plus or minus 1.3% during FOMC events, reflecting the market’s high sensitivity to Fed policy decisions.
Goldman Sachs equity analysts, including John Marshall, analyzed stock movements during the first rate cuts in the previous three Fed easing cycles (Sept. 18, 2007, July 31, 2019 and March 3, 2020).
The data highlights the average moves of several key S&P 500 stocks with liquid options during these periods.
Read Next:
Federal Reserve illustration created using artificial intelligence via MidJourney.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
It’s hard to believe that this newest bull market is nearly two years old. It seems like just yesterday we were talking about the 2022 bearish downturn amid a 40-year high in inflation. And as much heat as the Fed took for failing to act quickly enough to combat high prices, inflationary measures have gradually trended back toward their long-term target.
The Fed is about to cut its benchmark policy rate for the first time in more than four years. Markets have been pricing in an anticipated series of cuts for some time. As this bull evolves and takes the next step in its progression, we’ve started to see large-cap tech lag and rate-sensitive areas assume the driver’s seat as the rally broadens out.
This is a healthy and necessary rotation in terms of the sustainability of this new bull market. It makes sense when we think about it; as inflation softens, markets gain confidence in upcoming interest rate cuts.
Lower yields tend to help small-cap stocks gain traction, which are generally more interest-rate sensitive. Since these companies typically have a higher cost of borrowing, declining yields serve as a tailwind moving forward.
Small-Caps Gearing Up Ahead of Fed Announcement
The central bank has made it clear that it intends to cut rates slowly, remaining data dependent amid a resilient economy. This should be music to our ears, with forward returns for stocks quite appealing from a historical perspective.
There’s no doubt that small-caps have lagged throughout this latest bull market. The Russell 2000 – a group of stocks with $2 billion and under in market value – is a good gauge to use for these companies.
The group began to perk up heading into this week’s rate announcement, with the iShares Russell 2000 ETF IWM climbing about 12% from the August low (on an intraday basis). It’s almost as if these stocks were trying to tell us something.
And they were. As we can see below, on a forward 3-month, 6-month, and 12-month basis, small-caps have outperformed both their mid- and large-cap counterparts following the first rate cut of a new cycle (with data going back to 1950):
Of course, every rate-cut cycle is slightly different. This time around, the Fed initiated the first cut with the major US indices near all-time highs, not to mention substantial gains from the bottom of the 2022 bear market along with a looming presidential election.
But let’s keep in mind, what is the market’s primary concern? Earnings. And earnings-per-share growth expectations for small-cap companies are rising, with analysts anticipating that Russell 2000 constituents will grow at a persuasively faster rate than the S&P 500 in the coming quarters:
In addition, small-cap valuations remain fairly attractive relative to large-caps. Adding small-cap exposure to portfolios provides another opportunity for diversification as well.
Remember that these charts don’t predict anything about this cycle. They’re meant to demonstrate a wide range of potential outcomes so that readers aren’t led astray, particularly with all the noise out there from the financial media.
Leading Small-Cap Stock Surges
CommScope COMM is a global provider of infrastructure solutions for communications, data center, and entertainment networks. The company recently collaborated with Nokia NOK to develop a cutting-edge, AI-driven solution for deploying seamless in-building and campus-wide connectivity. CommScope has created a niche market for itself, helping customers scale network capacity, deliver better network response time, and simplify technology migration.
COMM stock was rated a Zacks Rank #1 (Strong Buy) and #2 (Buy) for much of this year before recently being placed with a Hold rating. The stock trades at just 5.8 times forward earnings and has surged more than 500% in just the past 5 months:
Image Source: StockCharts
Analysts covering the premier infrastructure provider have been raising earnings estimates across the board. Looking at the full year, EPS estimates have soared 1,733% in just the past 60 days. The Zacks Consensus Estimate now stands at $0.98 per share, reflecting a 53% growth rate relative to last year.
All Eyes on the Fed
An interest rate cut is all but assured from the Fed later today. There’s been plenty of attention from the financial media regarding whether or not we’ll see a 25-basis point or 50-basis point cut.
And while I think the FOMC will err on the side of caution with the former, the decision doesn’t matter as much as the path of cuts from here. Markets are pricing in around 200-basis points of cuts over the next 12 months.
Investors will be keeping a close eye on small-caps amid the first cut in more than four years. Make sure to take advantage of all that Zacks has to offer to uncover leading stocks like COMM.
Zacks Investment Research
Taiwan Semiconductor Manufacturing Company Ltd. TSM shares have surged 89.8% in the past year, outperforming the broader Zacks Computer and Technology sector’s 32.6% growth and the S&P 500’s 26.2% rally in the said time frame.
Such an impressive gain naturally leads investors to wonder whether Taiwan Semiconductor is still a compelling buy or if it is time to lock in profits.
The company has been benefiting from its scale and capacity, particularly for advanced technologies, which are constantly bolstering its footprint in the semiconductor manufacturing field.
One-Year Price Chart
Taiwan Semiconductor’s strength in wafer fabrication processes is the key catalyst. Its solid momentum among customers, increasing design wins, and strong presence in the domestic and international markets are major positives.
TSM Stock Rides on AI Boom
Taiwan Semiconductor’s strong positioning in the semiconductor industry, which is on the recovery path, owing to the growing proliferation of Artificial Intelligence (AI) and Generative AI, gives a strong hope that its robust advanced technologies will drive the stock further.
Semiconductors or chips — those necessary for AI developments — are in high demand from tech giants. The solid uptake of the Internet of Things (IoT), blockchain and cloud computing solutions is fueling demand for semiconductors.
Thanks to these favorable industry trends, Taiwan Semiconductor is experiencing solid demand for its advanced technologies, such as 3-nanometer (nm) and 5nm. Its strength in its other advanced technologies, such as 7nm, 16nm and 28nm, is another positive.
In the second quarter of 2024, 3nm, 5nm, 7nm, 16nm and 28nm accounted for 15%, 35%, 17%, 9% and 8% of the company’s wafer revenues, respectively.
Against this backdrop, TSM’s growing efforts to ramp up the production of 3nm are a plus. It is also making strides in the development of 2nm, which is capable of addressing the growing need for energy-efficient computing solutions and almost all AI innovators. This technology is designed to deliver a full node performance and power benefit, with 10-15% speed improvement at the same power, or 25-30% power improvement at the same speed, and more than 15% chip density increase.
Its expanding network of semiconductor facilities, which currently includes one 150mm wafer fab, six 200mm wafer fabs, six 300mm wafer fabs and five advanced backend fabs, bodes well for its production ramp goals.
Taiwan Semiconductor is constantly witnessing strong momentum across high-performance computing, smartphone, automotive, IoT and digital consumer electronics applications on the back of robust Fin Field-Effect Transistor (FinFET), which is powered by its advanced technologies. In the June-end quarter, these applications contributed 52%, 33%, 6%, 5% and 2% to the net revenues, respectively.
The growing adoption of the company’s multi-project wafer processing service, which allows customers to reduce mask costs, is driving its customer momentum further.
Solid Customer Momentum Drives TSM’s Growth
Taiwan Semiconductor enjoys a strong customer momentum on the back of its powerful solutions.
The company’s customer base includes many semiconductor bigwigs, such as NVIDIA NVDA, Advanced Micro Devices, Amazon Web Services, Broadcom AVGO, Infineon Technologies, Intel INTC, MediaTek, NXP Semiconductors, Qualcomm and Sony.
In 2023, the company’s 10 large customers contributed 70% to the total revenues. The largest customer among them contributed 25% alone, whereas the second-largest customer accounted for 11% of the net revenues in the same year.
Growing relationships with these behemoths are expected to continue driving top-line growth.
TSM’s Strong Outlook
For third-quarter 2024, Taiwan Semiconductor expects the solid adoption of AI and smartphones to boost the demand for its leading-edge process technologies. It projects revenues between $22.4 billion and $23.2 billion.
The company also expects above 20% growth in 2024 revenues due to rising demand for high-end chips used in AI applications.
The Zacks Consensus Estimate for third-quarter 2024 revenues is pegged at $22.72 billion, indicating year-over-year growth of 31.5%.
The consensus mark for third-quarter 2024 earnings is pegged at $1.74 per share, suggesting year-over-year growth of 34.9%. The estimate has been revised upward by 1.2% in the past 30 days.
The Zacks Consensus Estimate for 2024 revenues is pegged at $85.62 billion, indicating year-over-year growth of 23.6%.
The consensus mark for 2024 earnings is pegged at $6.45 per share, indicating year-over-year growth of 24.5%. The estimate has been revised upward by 2.2% in the past 60 days.
TSM Offers Attractive Valuation
TSM stock is currently trading at a discount with a forward 12-month P/E multiple of 21.57X, lower than the sector’s average of 25.94X. This reflects a good entry point for the investors.
Conclusion
Investors considering Taiwan Semiconductor should weigh its robust technological foundation and strong positioning in the promising semiconductor industry. Its solid customer momentum and strong network of semiconductor fabs present a lucrative opportunity for investors to add the TSM stock to their portfolio.
Taiwan Semiconductor currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Investment Research
ServiceNow NOW shares have returned 6.4% in the past month, outperforming the Zacks Computer & Technology sector and the Zacks Computers – IT Services industry. While the sector has dropped 2.6%, the industry has returned 5.4% over the same time frame.
ServiceNow has been benefiting from strong expansion in clientele as enterprises undergoing digital transformation continue to adopt its workflow solutions. NOW’s growing Generative AI prowess and strong partner base are driving prospects.
Year to date, ServiceNow shares have returned 25.4%, and the momentum is expected to continue in the second half of 2024.
NOW shares are trading above the 50-day and 200-day moving averages, indicating a bullish trend.
NOW Trades Above 50-day and 200-day SMA
Let’s dig deeper to find out the factors driving NOW’s prospects.
Year-to-Date Performance
NOW’s Q3 & 2024 Guidance Encouraging
ServiceNow expects third-quarter 2024 subscription revenues between $2.66 billion and $2.67 billion, suggesting an improvement in the range of 20-20.5% year over year on a GAAP basis. At constant currency, subscription revenues are expected to grow 20.5%.
ServiceNow expects the non-GAAP operating margin to be 29.5% in the current quarter.
For 2024, NOW expects subscription revenues to be $10.575-$10.585 billion, which suggests a rise of 22% from 2023, both on a GAAP and non-GAAP basis.
ServiceNow expects the non-GAAP subscription gross margin to be 84.5% and the non-GAAP operating margin to be 29.5% (up from the previous guidance of 29%).
NOW’s Earnings Estimate Revision Shows Upward Movement
The Zacks Consensus Estimate for 2024 earnings is pegged at $13.75 per share, up 1.8% over the past 60 days, indicating a 27.55% year-over-year increase.
The consensus mark for third-quarter 2024 earnings is pegged at $3.46 per share, up a couple of cents over the past 60 days, indicating an 18.49% year-over-year increase.
ServiceNow, Inc. Price and Consensus
ServiceNow, Inc. price-consensus-chart | ServiceNow, Inc. Quote
The Zacks Consensus Estimate for third-quarter revenues is pegged at $2.74 billion, indicating year-over-year growth of 19.78%. The consensus mark for 2024 revenues is pegged at $10.9 billion, suggesting growth of 21.51% over the 2023 reported figure.
Strong Portfolio & Partner Base Aids NOW’s Prospects
ServiceNow is extensively leveraging AI and machine learning technologies to boost the potency of its solutions. NOW’s expanding GenAI capabilities are noteworthy, as its total addressable market is expected to hit $275 billion in 2026.
ServiceNow’s latest update, Xanadu, offers AI-powered, purpose-built industry solutions for domains including telecom, media, and technology, financial services and the public sector.
The Xanadu update adds new AI capabilities to boost customer agility, enhance productivity and improve employee experiences. It expands the GenAI portfolio to enterprise functions, including Security as well as Sourcing & Procurement Operations.
NOW plans to integrate Agentic AI into the ServiceNow platform and unlock 24/7 productivity at a massive scale. This service will be available this November for Customer Service Management AI Agents and IT Service Management AI Agents. It is expected to reduce the time taken to resolve an issue and make live agents more productive.
A strong partner base that includes the likes of Visa, Microsoft MSFT, NVIDIA NVDA, International Business Machines IBM, Genesys, Fujitsu, Equinix, Boomi and Infosys is strengthening NOW’s AI capabilities.
The much anticipated Now Assist integration with Microsoft Copilot for Microsoft 365 is now generally available.
Strong Liquidity Makes NOW Stock Attractive
A strong liquidity position with a cash balance of $5.41 billion as of June 30, 2024, is noteworthy. ServiceNow generated a free cash flow of $359 million in the second quarter of 2024.
NOW expects the free cash flow margin to be 31% for 2024.
The strong liquidity position allows NOW to pursue various growth opportunities, including acquisitions. ServiceNow completed the acquisition of Raytion to enhance GenAI-powered search and knowledge management capabilities on the Now Platform.
NOW’s Strong Prospects Justifies Premium Valuation
However, NOW stock is not so cheap, as the Value Score of D suggests a stretched valuation at this moment.
In terms of the forward 12-month Price/Sales ratio, NOW is trading at 14.61X, higher than its median of 13.34X and the Zacks Computer & Technology sector’s 6.14X.
Price/Sales Ratio (F12M)
Nevertheless, we believe the strong growth prospect justifies ServiceNow’s premium valuation.
Conclusion
ServiceNow’s robust GenAI portfolio and strong partner base are expected to drive its clientele, thereby boosting subscription revenues. The Growth Score of B makes the stock attractive for growth-oriented investors.
ServiceNow currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Investment Research
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