Morgan Stanley said in an Aug. 25 research note that Semtech recorded $100 million in second-quarter data center revenue, up 39% from the prior quarter and 91% from a year earlier, marking a record high. The bank said the gain was mainly driven by continued strength in 800G FiberEdge and faster-than-expected certifications for 1.6T FiberEdge.
The firm said 1.6T FiberEdge and CopperEdge are expected to contribute more than 50% of data center revenue in the third quarter. Morgan Stanley raised its price target on Semtech to $195 from $175 and maintained an Equal-weight rating.
Data center demand remains ahead of expectations
The note said demand for 800G remains strong. Industry expectations for 800G optical module unit shipments have increased from about 50 million units at the start of the year to 80 million to 90 million units. The ramp for 1.6T is also running faster than expected.
Third-quarter guidance was also described as strong. Morgan Stanley said Semtech expects data center revenue of about $145 million, up 45% quarter over quarter and 160% year over year, with FiberEdge as the main driver. In the fourth quarter, ACC, or active copper cable, is expected to begin volume deployment at major hyperscale customers, adding to demand for 800G and 1.6T optics.
Based on that outlook, Morgan Stanley raised its full-year forecasts and said it expects fiscal 2027 data center revenue growth of about 140%, followed by nearly 70% growth in fiscal 2028. The report said supply is replacing demand as the main constraint, and the supply chain is expanding capacity to support further upside.
On the earnings call, company management said Wall Street was paying “too much attention” to the active copper cable opportunity. The bank added that the ramp pace for copper cable retimers is broadly in line with its model, while the real growth driver remains on the optical side.
Gross margin improvement and portfolio changes
Morgan Stanley said gross margin is improving quickly, helped by a better revenue mix in data center and LoRa. Semtech guided for third-quarter adjusted gross margin of 58.3%, up 380 basis points from the prior quarter.
Excluding the module business that is set to be divested, pro forma gross margin would already be 63.9%. Morgan Stanley said this is “a starting point, not an endpoint,” adding that margin could continue to rise as higher-margin 1.6T, CopperEdge, and photonics products make up a larger share of revenue.
Semtech has already announced the divestiture of its module business. According to the note, the move is expected to bring another structural lift to gross margin and operating margin, with a neutral impact on non-GAAP earnings per share. Management is expected to provide details of its long-term financial model at an upcoming analyst day.
LoRa and longer-term optical positioning
Outside the data center segment, LoRa also hit a record high. Semtech reported second-quarter LoRa revenue of $58 million, up 31% quarter over quarter and 58% year over year. Third-quarter LoRa revenue is expected to rise another 15%, driven by LoRaWAN, LoRa Plus, and Amazon Sidewalk.
Over the longer term, Morgan Stanley said Semtech is building a broader optical communications footprint across NPO, or near-packaged optics, CPO, or co-packaged optics, and 3.2T through its existing linear architecture and the expanded photonics portfolio gained from the Hiefo acquisition. The note said NPO is still tied to a 2028 timeline for scaled production, but Semtech may be able to enter earlier through its existing LPO architecture. The 3.2T opportunity could also increase system value across lasers, photodetectors, transimpedance amplifiers, and drivers.
Valuation and revised forecasts
Morgan Stanley raised its price target to $195 from $175 based on 34.5x non-GAAP EPS of $5.66. As earnings forecasts moved higher, the target multiple fell from 48x to 34.5x. The bank said the valuation is still above Semtech’s historical range, but broadly in line with smaller-cap peers that also have AI exposure.
The bank lifted its fiscal 2027 and fiscal 2028 revenue forecasts from $1.408 billion and $1.683 billion to $1.529 billion and $1.895 billion. It raised gross margin forecasts from 54.2% and 55.0% to 56.9% and 62.7%, and increased EPS estimates from $2.90 and $3.76 to $3.69 and $5.65.
Morgan Stanley kept its Equal-weight rating, saying valuation is already fairly full and execution on new data center products still needs to be proven. Even so, the note said continued upside in data center demand and faster-than-expected gross margin improvement could still drive further earnings revisions.
Analyst coverage disclosed in the appendix
In the disclosure appendix, Morgan Stanley analyst Joseph Moore listed ratings on major semiconductor names under his coverage: NVIDIA as Overweight, Broadcom as Overweight, AMD as Equal-weight, Intel as Equal-weight, Marvell as Equal-weight, Micron as Overweight, and SanDisk as Overweight.
The source article said it was a summary and interpretation by Chaos Research of a third-party broker report from Morgan Stanley dated Aug. 25, 2026, combined with public market information. It also said the ratings, price targets, earnings forecasts, and related views cited in the piece are those of the broker’s analyst and represent the institution’s stance, not the view of Chaos Research, and do not constitute investment advice.
The source article also stated that markets involve risk, decisions should be made independently, and the article should not be used as a basis for buying or selling any securities.