The Truth Is Stranger Than Fiction With This Stock

I recently reread Edgar Allan Poe’s short story "The Thousand-and-Second Tale of Scheherazade," and it reminded me of Wall Street.

Yes, that’s odd. But bear with me.

If you read Arabian Nights when you were younger, you’ll know that it’s a story of a woman (Scheherazade) prolonging her death sentence, ordered by her husband (a sultan), by adding to a wild fictional story each night.

The story is never actually finished, so the sultan needs to keep listening.

Scheherazade’s plan works out so well that her husband falls asleep each night, then orders her back the next day to hear what’s next, thus stalling the execution.

This occurs for 1,001 nights before she’s finally set free.

So, Poe’s story is the next tale, the next night. And it centers around the theme of "the truth is stranger than fiction"—because the heroine relays the story of Mammoth Cave, the Hot Air Balloon, Maelzel’s Chess Player, and more.

And that’s just what the stock market is like.

The Truth Is Stranger Than Fiction

A $2 billion chip company reports its earnings on March 28.

There are numerous red flags.

The company grew its revenue from $510 million in 2020 to $868 million in 2024. That’s great. What isn’t so great is that the cost of revenue—overhead, essentially—grew from $210 million to $494 million over that same period.

Operations have become a bit expensive.

This is nowhere more evident than in the fact that the company tallied an overall billion-dollar loss this year, which means operations, business strategies, and investments all amount to major losses.

What’s more, rising interest rates are killing this company. In 2020, when interest rates were still near zero, the company only needed to pay $9 million to service its debt. Today, it’s ten times more—at $94 million.

What’s bad about that figure is that when there’s too much debt and the company can’t service it with profit, they need to search elsewhere—to their cash reserves or borrowing. And they’ve done both.

The strong card for tech companies is their mounds of cash. This company is hemorrhaging it. In 2020, they had $293 million in the bank. Great. Now, they have less than half of that—at $128 million.

They’re aggressively borrowing to cover debt and interest expense, which means they’re facing liquidity issues—which they may be able to resolve with an inventory glut… as they have.

The problem?

Even though demand for semiconductors (AI chips, AI chips, AI chips) is high right now, because geopolitics is in a fragile state, where the demand is, is very important.

And for this company, 76% of overall customers are outside of the U.S.

This is not to mention that 32% are in China... and with the U.S. government shielding U.S. company intellectual property, bringing chip manufacturing “back home” (CHIPS Act), and China reacting with home protections of their own, a third of the business to the "Red Dragon" doesn’t sound like a great idea.

Rife with Issues, But...

So, what do you expect out of this company? After hearing that (and there are other red flags, trust me), you’d expect the stock to halve in a day or two of trading.

Instead, major Wall Street firms—Oppenheimer, Susquehanna, and Stifel Nicolaus, among others—have upgraded and raised price targets.

What’s more, the stock is up 20% since reporting these figures.

The truth is truly stranger than fiction with Semtech (SMTC) right now.

But as is often the case, reality will catch up with it.

We don’t know what’s going to happen in the days ahead. But because markets are so emotional, let the emotions play with it a bit. There’s no predicting that.

The excitement will wear off.

And when it does, I suggest playing it to the downside with put options.

The company will report earnings again in early June, and we’ll get another look at negative profitability, high debt servicing costs, and aggressive borrowing that I think will take the stock much, much lower.