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Semtech's Reversals of Fortune

SAN FRANCISCO -- When analog chip maker

Semtech

(SMTC) - Get Report

crowed over its earnings surprises earlier this year, investors sneered. But in July, when it warned of a drastic drop in revenues, investors rushed in: As of Friday's close, the stock had settled at 16, a 54% rebound from its July 8 low of 10 3/8.

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The warning caught investors' attention, but it was something else that made them buy. Orders of the Newbury Park, Calif., company's PC-related analog chips were starting to pick up -- so robustly that some customers were suffering shortages.

Now, Semtech's stock could be heading down yet again. The recent surge in orders may prove short-lived. While promises of back-to-school and Christmas sales are renewing demand for these chips, the PC business historically softens once the holiday sales taper off.

The past six months have been bad for just about every analog chip maker. Following a strong 1997, companies boosted production anticipating similar growth in 1998. "But demand did not catch up to the buildup of inventories," said Jim Liang, a semiconductor analyst with technology research firm

Dataquest

.

Indeed, PC sales slowed.

Compaq

(CPQ)

and

IBM

(IBM) - Get Report

, two of Semtech's top customers, found themselves with a glut and slashed orders for new chips. Half of Semtech's sales come from PC makers, making the company one of the most PC-dependent analog companies. On average, PC chips make up a fourth of the analog sector's revenues -- the rest go in cellular phones, modems, digital videodisc players and industrial equipment.

And so Semtech, the first to be hit by the downturn, saw its stock price tumble in November. The more diversified chip makers, such as

Linear Technology

(LLTC)

or

Analog Devices

(ADI) - Get Report

, didn't take a hit until spring.

For Semtech, the worst came with the July 7 warning. The company said it expected a 15% drop in net sales and a 50% decrease in net income from the previous quarter's 30 cents-a-share profit thanks in large part to "weak demand" from the PC market. The company's stock had fallen 19% from its July 2 close of 17 3/4 even before the preannouncement. It fell another 28% the next day. At its lowest point, the stock was 71% down from its 52-week high of 35 in October.

But on Aug. 25, when Semtech delivered earnings that were actually worse than the preannouncement, the stock held its ground and even gained in the following days. Semtech posted a profit of 5 cents a share, down from 24 cents a share in the year-ago quarter and 30 cents a share in the previous quarter. But with signs of recovery in PC orders, investors were optimistic that the worst was over.

"Semtech had said there would be no pickup until the end of the year," said Douglas Lee, a semiconductor analyst for

NationsBanc Montgomery Securities

. "But orders in the month of June were actually 26% better than in May. July orders were up 30% and August 8%." (Montgomery has an underwriting relationship with Semtech.)

With the seasonal nature of PC sales, not everyone is convinced the company is back on the right track.

One institutional investor that is holding off is

Greenville Capital Management

, which manages about $400 million in individual accounts and was one of Semtech's biggest investors last year. It sold off its holdings around the time the stock started to tumble. "We got out of it because we were worried about its end markets," said fund manager Bill Kitchel. "Semtech has nearly half its exposure in PCs and that is seasonally very strong right now, but I'm not convinced that will give it visibility through the end of the year."

For more information on institutional holders of this stock, as well as financial statements and earnings estimates, please see the

Thomson Company Reports.