- Revenues are growing again and growth seems sustainable
- Technically well placed to monetize major trends like Wearable electronics, Internet Of Things (IOT) and Smartphones
- Consistent revenue growth, margin expansion and estimate revisions should drive the stock higher
- Stock has 30-40% upside in the near term
Lattice Semiconductor Corp. (LSCC) stock is up 30-40% in the last 3 weeks and is trading at the same levels where it was three years ago. There are bound to be calls for profit booking, but correction in the stock price might be a good opportunity for long-term investors, as the stock seems poised for growth as earnings and valuation expectations get readjusted.
Lattice is not a slow growth, low margin or a niche product company any more, but a company that is executing well by entering new markets, ramping volumes, innovating new products and expanding margins. The stock, which is selling at 21 times streets conservative EPS estimates, should move higher following the fundamentals.
Graduated to an innovative high revenue growth company
The worksheet below clearly shows the accelerating revenue growth of the last few quarters and looking at the fundamentals, this growth seems sustainable. Darin Billerback, CEO, summed it well, when he said the following in the most recent conference call
"We have made the jump from being a predictably slow 30-year-old CPLD company, to being an agile first mover in the exciting world of the Internet of Things."
Revenue growth Y/Y
The revenue growth trend is well established and accelerating after achieving revenues, which are close to the highest levels achieved in a decade. What's even more important is the fact that results are defying seasonality.
The company's product portfolio is well placed to monetize two of the most promising themes in hardware - Internet of Things and Wearable electronics. Product portfolio, revenues from New Products and expanding OEM relationships, all establish the sustainability of this revenue growth trajectory.
Technology behind the outperformance
There is innovation behind this newfound growth. Lattice, with its low power, smaller footprint and cheaper FPGA solutions is displacing the traditional ASICs. Besides the physical attributes, having reprogrammable functionality is an additional advantage.
Source: Lattice Semiconductor presentation
These sub-1.5mm devices have a clear advantage in end markets like Smartphones, medical and Wearable electronics. The latest products like XO3 seem well placed to maintain this edge. Lattice FPGAs also have an edge in displacing small microcontroller sensor hubs or in the auto sector, which is increasing its use of programmable technologies.
Consumer end market driving the growth, so far, but others may join in soon
Source: SEC filings
The consumer has been the lone growth engine, so far, with revenues growing at triple digits for the last few quarters. Ramp up of new product families - iCE and MachXO2, helped the last year's Consumer division revenue growth.
This year, ramp up of Wearables and MachXO3 products should drive the revenue growth for the consumer division. Smartphones, where the penetration for Lattice FPGA is still less than 10%, should grow on the back of increasing penetration rates.
Consumer division, which is supplying to two of the top three Mobile OEMs and make up close to 1/3 of the total revenue for the company, is clearly in the driving seat as far as revenue growth is concerned.
Communication is back
Communication revenue grew after years of flat to declining growth rates. The growth was due to strong demand out of China, which is expected to stay strong with the help of China Mobile's LTE build outs. From a product standpoint, ECP3 and MachXO2 are gaining traction compared to the competitors due to lower ASP's and other technological advantages.
Sustainability of the top line growth is encouraging
The loudest reply to questions related to the timing of the "Long Lattice" thesis comes from the percentage breakup of revenues between New Products, Mainstream and Mature.
Source: SEC filings
After years, declining revenues from Mature Products have ceased to be of a size that can cast a pall over the company's revenue growth rate. Revenue growth of New Products is the most promising sign of sustainability of the current revenue growth trajectory.
Source: Lattice Semiconductor presentation
Revenue growth rate of New Products has accelerated in the past few quarters, but more importantly, Mainstream Products have stabilized and the deceleration of the Mature Products has started to ease. Both these product groups have been a drag on the total revenue growth rate of the company.
Improvement in end markets like industrial and automotive should boost revenues for the mature products.
Earnings to get a boost from margin improvements
After more than a year, gross margins have stabilized and operating margins have started to show improvements with operating expenses declining in absolute terms and as a percentage of the total revenue.
Research & Dev.
Going forward, earnings should get a boost from both gross margins and operating margin improvement. Gross margins should get a boost from
- New Product revenue growth
- Mature products that carry a higher gross margin stabilizing
- 130 to 90 nanometer transition at Fujitsu
- Volume ramps
- Improvement in industrial end markets
The company has set a target of 55% gross margins, which is quite achievable. On the operating margins front, operating expenses are anticipated to remain at $38-39 million, which should help improvements related to revenue growth and gross margin to fall straight to the bottom line.
The estimates seem conservative
The street is expecting approximately 10% revenue growth and 27 cents of EPS for 2014. Even a back of the envelope calculation shows the magnitude of conservatism in drawing these numbers.
IF target achieved
Some noteworthy assumptions are
- Revenue growth of 20% instead of street's 10%
- Gross margins of 55%, which is much lower than 59% in 2011
- Operating margins of 13%, which is much lower than 15% in 2011
On the revenue front, 10% looks like a conservative estimate, especially looking at the current revenue growth trajectory or the factors discussed above. As the worksheet below suggests, this 10% figure is closer to the last 5 years average than the current momentum.
Revenue growth estimates conservative
Street 2014 Estimate
Q1 2014 Est.
Seasonally weak quarter
Seasonally weakest quarter
Last 5 year avg.
While looking at the valuation
Using historical numbers, the stock may look expensive for deep value investors, but there are a few things worth keeping handy while running up the numbers.
- Book value is growing again
- Cash per share of approximately $1.9
- The company actively buys back shares
The stock has run up after a decent quarter, but the story is more than a decent quarter. The product portfolio of the company is well positioned in the fastest growing markets. After strong gains of the last 2-3 weeks, any correction based on technicals might be a boon for long-term investors. Target of $10-12 is based on 25 times estimated 38 cents EPS plus cash and 3 times book value.