Semtech's Returns on Capital Employed Show Promising Trends, Potential for Future Growth

Semtech's return on capital employed (ROCE) has risen to 7.9% over the last five years, indicating the company is earning more per dollar of capital invested and reinvesting at higher rates. The stock has declined 13% in the last five years, but astute investors may see this as an opportunity to invest due to the promising trends.

Semtech Corporation (SMTC) has shown a significant improvement in its return on capital employed (ROCE) over the last five years, rising to 7.9%. This metric indicates that the company is earning more per dollar of capital invested and reinvesting at higher rates. Despite a 13% decline in the stock price over the same period, this trend presents an opportunity for astute investors to consider Semtech as a potential investment.

Semtech's ROCE improvement is driven by several factors. The company has been able to increase its gross margins and operating margins, which are key components of ROCE. In Q2 2025, Semtech reported a non-GAAP gross margin of 50.4%, up from 49.0% in the previous quarter, and a non-GAAP operating margin of 14.2%, a 200 bps sequential gain [3]. These margins reflect the company's strategic bets on high-margin 5G and AI-driven markets.

Additionally, Semtech's focus on R&D and debt reduction has contributed to its improved ROCE. The company spent 15% of its FY2025 revenue on R&D and pre-paid $25 million in debt in Q1-Q2 2025. This disciplined approach to capital allocation has helped Semtech to reduce its cost of capital and improve its ROCE [3].

However, Semtech faces near-term challenges, including inflationary pressures, geopolitical tensions, and softness in the industrial segment. The Connectivity business, which includes LoRa and 5G modules, is expected to grow but may face margin compression from pricing pressures. Nevertheless, the company's focus on high-margin AI and data center applications, where demand is accelerating, offsets these risks.

Looking ahead, Semtech's Q3 results and subsequent guidance will provide further insights into the company's ability to maintain its margin expansion and revenue growth. Analysts expect the company to report revenue of $256.1 million for Q2 2026, representing an 18.9% year-over-year (YoY) increase, and non-GAAP earnings per share (EPS) of $0.40, up 263.6% YoY [1, 2]. These expectations, if met, would signal continued improvement in the company's financial performance.

Investors should monitor Semtech's earnings call and subsequent market reactions to assess the company's ability to navigate market uncertainties. While the stock's valuation remains high, the company's promising trends and strategic positioning in 5G and AI markets present a compelling long-term story. For risk-tolerant investors, Semtech's stock may offer an opportunity to accumulate shares during dips in the stock price.

References:
[1] https://www.nasdaq.com/articles/stay-ahead-game-semtech-smtc-q2-earnings-wall-streets-insights-key-metrics
[2] https://www.benzinga.com/analyst-stock-ratings/price-target/25/08/47281428/semtech-likely-to-report-higher-q2-earnings-these-most-accurate-analysts-revise-forecasts-ahead-of-earnings-call
[3] https://www.ainvest.com/news/semtech-q2-earnings-strategic-position-5g-ai-driven-markets-calculated-entry-point-2508/