SAN FRANCISCO -- In the communications world, analog chips are the ugly sister to the sexier digital processors. Take Semtech (SMTC) - Get Report, a maker of analog chips for power management and testing equipment. Try talking about the company's products at a cocktail party, and you're sure to produce yawns.

But Semtech's stock is something to talk about. In the past year, shares of the company have risen 423% to close Friday at 54 1/4. That compares to a 90% increase in the

Philadelphia Stock Exchange's

semiconductor index and a 19% rise in the

S&P 500

for the same period.

Because Semtech went on a hiring binge just when demand was picking up for its chips, analysts say the stock could advance even further. Demand is especially strong for analog chips -- which turn signals such as voice and other sounds into digital data.

Revenues from analog chipmakers declined almost 5% in 1998 after companies produced more than they could sell. Even during that rough patch, Semtech's revenue grew 11%. And it should see more growth with the analog market poised to rebound. Investors and analysts cite the company's aggressive investments in engineers for Semtech's strength.

"There has been a huge effort to acquire talent," says one small-cap portfolio manager whose firm was one of Semtech's top institutional investors earlier this year, but who asked that his name not be used. Semtech ended fiscal 1999 in January with 76 researchers and designers, up from just 30 the year before.

That has boosted Semtech's ability to bring out new products quickly. In the first quarter of this year alone, the company introduced 16 new product lines and reported 185 new design wins -- that's the term used for acceptance of a product by a potential customer. The result was a 16% rise in new orders from the fourth quarter of last year despite the seasonal slowdown in the PC market.

Semtech's quick upturn has surprised many people, partly because few

expected the strong demand in PCs that hit in the second half of last year, and the PC market accounts for almost half of Semtech's sales.

BancBoston Robertson Stephens

analyst Arun Veerappan noted that as PC-related sales have slowed, sales of testing equipment, which make up about a fifth of the company's revenue, have finally picked up.

"It has been in the dumps for the past three years and is really starting to pick up as they see some of their customers return to ordering after a very long pause," he says. Veerappan rates the company long-term attractive. (BancBoston is not an underwriter of Semtech.)

Semtech is also seeing strong growth in chips that go into notebook computers as well as handheld devices that depend on low voltage to save power, guard against power surges and extend battery life, Veerappan says. "This has been a very good business for them," he says.

The handheld market especially is ready to take off. Research firm

International Data

estimates the number of information appliances shipped will grow to 55.7 million in 2002 from 5.9 million this year. Semtech is one of a small handful of analog chip companies making power regulators, including

Power Integrations

(POWI) - Get Report

and

Micrel

(MCRL)

. And these companies too have seen their stock more than triple in the past year.

For continued growth, analysts look at demand for analog products in general. The

Semiconductor Industry Association

says the sector is at the beginning of a long cyclical upturn. The group predicts that total revenues from analog products will grow 50% during the next four years, with greatest demand in products geared to the communications market.

Many specialized analog chip companies like Power Integrations or

RF Micro Devices

(RFMD)

depend on a limited customer base, but Semtech doesn't have that problem. It now sells to some 2,000 customers, double the number in 1997. And no one customer accounts for more than 10% of sales.

CIBC Oppenheimer

analyst Ken Pearlman says Semtech seemed to come out of the blue for a lot of investors because for years it was known as a stodgy producer of military chips with half a dozen engineers. Several years ago it started making clones of products made by communications chipmakers

Linear Technology

(LLTC)

and

Maxim Integrated Products

(MXIM) - Get Report

. But it took the money it made off those chips to hire engineers like mad and invest in new designs. (Oppenheimer is not an underwriter of Semtech.)

Now more than 60% of their products are proprietary, Pearlman says, meaning no one else makes them. He has a buy on the stock. "I wish I had put a strong buy on it when I picked up coverage at 27," he says. "It's a good story. People are just now recognizing that."