Why Semtech Is the Top AI Stock to Buy in April

In the latest episode of 24/7 Wall St.’s AI Investor Podcast, I recommended Semtech (NASDAQ:SMTC). The headline is that I’m confident the company is at the beginning of a strong inflection point from data center sales. Semtech is a deeply technical company, so let’s dive into what it does and the opportunity I’m so excited about.

Investors Are Betting Big on Optics

On the AI Investor Podcast, we manage a portfolio of our top stock recommendations. The top-performing stocks we’ve recommended in the portfolio are by far our optics plays. Many of these recommendations are up 200% to nearly 1,000% across the past 18 months.

As you can see, stocks in this space have been red-hot. The key reason is that optics (transmitting data through light) are quickly becoming essential to the massive data center buildout happening across the world.

The key component in optics is ‘optical transceivers.’ They plug into the back of servers and convert data moving as light across fiber optics into electrical signals. Industry researcher LightCounting now sees the possibility of a ‘fantastic growth’ scenario which could see the optical transceiver market growing from less than $10 billion in 2023 up to nearly $120 billion in the next five years!

This inflection point is already being seen in the performance of many stocks in the space. Coherent recently reported a book-to-bill ratio above 4 for its data center segment. This is an astounding number that management described as a “step-function increase” in orders. The company is already booked up across 2026 with orders filling into 2027. It’s safe to say the industry is seeing unprecedented demand.

How Semtech Fits In

Seeing the returns above, I can see how you’d say “I missed the boat on optics” if you haven’t already invested. Yet, in the recent episode of the AI Investor Podcast (embedded below), I dove into why Semtech could be an opportunity in the space that most investors are overlooking.

Semtech has two core businesses. First, it creates LoRa chips that are used in IoT infrastructure across the world. That’s a fine business, but what really excites me is the company’s signal integrity business, which is seeing explosive growth thanks to the rise of AI data centers.

Taking a quick trip down memory lane, at the beginning of the smartphone boom, investors flocked to stocks like Qualcomm that made the modems for phones. However, the real money was made on a much more ‘hidden’ play. Companies like Avago and Skyworks made chips to amplify and filter out cellular signals, and saw massive returns.

For example, between the start of 2010 and the end of 2015 (what I’d consider the ‘peak’ of smartphone growth), Avago shares soared 669% and Skyworks jumped 418%. Those returns both easily outpaced what Apple saw.

Semtech is a similar concept in optics. The optics space is booming and moving to faster and faster transceiver data throughput. While most transceivers today are 800 gigabits (800G), the next step is 1.6 terabits (1.6T) and beyond that is 3.2 terabits.

What’s fascinating is that with each increase in data throughput that’s being necessitated by AI networking, the amount of revenue Semtech collects is booming. During the 800G generation, Semtech’s product collects less than $10 per optical transceiver.

However, as the market switches over to 1.6T transceiver speeds, Semtech’s opportunity jumps 2-3X. Then, when the industry expands to 3.2T speeds, Semtech’s revenue opportunity per module jumps another 2X-3X. Add it up, and the amount of money Semtech makes per transceiver could soar by 10X in the years ahead.

The reason for this jump is similar to what happened in smartphones. As speeds increased, the cost to filter signals increased at increasing rates. This led to the massive returns companies like Avago and Skyworks saw.

Similarly, the complexity in cleaning and amplifying signals increases massively as networking speeds increase. In total, Semtech estimates its transimpedance amplifiers (TIAs) will move from commanding $5 to $9 per optical module today up to $80 in 3.2T modules as the company expands to multiple components. It’s worth noting that Semtech also has products for copper as well, giving it multiple pathways to growth throughout the data center.

Free Cash Flow and Analyst Conviction Back the Thesis

FY2026 free cash flow reached $171.4 million, with Q4 alone generating $59.1 million, more than all of FY2025. That cash generation is funding accelerated R&D while simultaneously deleveraging the balance sheet. Adjusted interest expense fell sharply as the company prepaid term loan principal, redirecting savings into innovation. Wall Street has taken notice: 14 analysts rate SMTC a buy, one holds, and none recommend selling, with a consensus price target of $104.62 against a current price of $86.95.

The biggest risk facing Semtech is valuation. The company is worth about $8 billion versus sales of $1.05 billion. The company is trading for about 46X the free cash flow referenced above. Wall Street expects Semtech to deliver $2.20 in earnings this year, which puts the company at slightly below 40X this year’s profits.

That’s an elevated price, but I also believe Wall Street is underestimating the ramp in profitability Semtech will see in the coming years. Between Fiscal 2026 and 2029, I expect profits will more than double as data centers become the company’s main business line and the company sees strong ‘operating leverage’ on sales that flow cleanly down to the bottom line.

The Big Picture

At the end of the day, Semtech is a little-known stock with a big opportunity in the AI era. I’m happy to add it to the AI Investor Portfolio.

As a final parting note, our average recommendation in the AI Portfolio is up more than 100%, which is solidly crushing the market and every AI ETF I track since we launched it. Recommendations like Semtech are absolutely free to receive, just make sure you’re subscribed to the AI Investor Podcast in your favorite podcast app to receive every new episode where we issue new recommendations and talk about the biggest news in investing.