Ron-
If I may respond to your query...
I have owned CSCO for quite a while, and I believe that SMTC offers similar (although not as significant) long-term appreciation potential. SMTC is no AMD. It is certainly a buy-and-hold stock, although it could be traded with some success, due to its high volatility.
The major growth drivers for SMTC are:
1) The increasing demand for low-dropout regulators (LDO) in PCs. As processors become more powerful, they will need to operate at lower voltages, so that they don't overheat. In order to operate at lower voltages, these chips must be protected by voltage regulators, which prevent damage by power fluctuations (known as dropouts). SMTC's LDO sales should benefit from the transition to Pentium II, Merced (64-bit), Cyrix/NSM processors, and AMD's processors. These products are also used in portable PCs, such as notebook/laptops. In order for these PCs to conserve battery life, they must operate at lower power consumption rates. Just as in the processors, these PCs will require voltage protection at lower voltages.
2) The increasing demand for transient voltage suppression (TVS) in high speed/frequency data transmission. Peripheral devices and communications equipment, such as modems, xDSL, cellular handsets, wireless base stations, Universal Serial Bus ports (USB), networking equipment (remote access concentrators, etc.) need protection from static electricity and power surges. Semtech's TVS line is more exciting than the LDOs, because these products are more customized to the customers' needs. Accordingly, price competition is less of an issue, and the gross margins are significantly higher than for LDOs.
3) The increasing demand for automated test equipment (ATE) for the semiconductor market. After a silicon wafer is etched and printed with the circuit design, it is cut, assembled and packaged in its IC packaging. Before the chip can be shipped, it must be tested by a series of "burn-in" tests. The equipment that performs such tests is called ATE. The leading U.S manufacturer of ATE is Teradyne (TER). Semtech's recently completed acquisition of Edge Semiconductor provides Semtech with a leading designer of ATE chips, devices that are necessary components of ATE for Teradyne and other ATE manufacturers. As microchips become more powerful, they will need to be subjected to more rigorous testing. More rigorous testing requires that the ATE contain ever more powerful and fast chips (which Semtech produces). ATE chips carry higher gross margins than most Semtech products.
From what I understand, the end-markets served by the above product lines are expected to grow by at least 25% for the next several years. Because SMTC is a small company (relative to the industry), and it is a well-run company, it is rapidly gaining market share. It should continue to grow at a faster pace than the overall industry. I believe that long-term sustainable revenue growth of 30% is likely. Furthermore, the most rapidly growing segments of Semtech's business command higher margins than the business as a whole. As a result, Semtech should be able to achieve EPS growth of at least 35% for the foreseeable future. I certainly believe that SMTC has tremendous long-term potential, both for its business and its stock.
Hope this helps.
Todd |
