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Lattice Semiconductor: This Chip Stock Can Deliver Solid Gains

May 25, 2014 | About:
kcpl

kcpl

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Lattice Semiconductor (LSCC) is doing well. It has seen improvements in its operations. The company excels in the manufacture of programmable chips which are sold in various segments such as mobile, communications, automotives, industrial etc. The reason for the company’s strong performance has been its key customers such as China Mobile and Cisco. On the back of a strong client base, Lattice has seen a good 40% growth in its stock price. Let us take a look at its business.

Strong performance

Lattice is seeing solid tailwinds as the company’s revenue came in 23% higher on a year-over-year basis, while earnings grew 20%. The company issued a strong outlook for the upcoming quarter. Lattice is expecting earnings of $0.04 per share. The company has posted a recovery in earnings as it saw a loss of $0.06 per share in the prior year period. Moreover, Lattice is seeing improvements in the profit margins as a result of cost saving initiatives.

The road ahead

Lattice is also making moves to strengthen its production line. Under this, the company is focused on making its production process more efficient and is transitioning to a 90-nanometer process from the 130-nanometer process. This robust move by the company is expected to hurt Lattice’s profit margins slightly in the short term, while in the long term, the company will see higher gains arising from this initiative.

Lattice’s growth has been quite impressive as the company has methodically pursued its objectives. It saw 300% year-over-year growth in consumer revenue in the previous quarter, which was a result of design wins at two key mobile OEMs. Going forward, the company is looking to generate more business from these mobile customers.

Despite weakness, Lattice is slowly gaining traction as the company’s communication business is seeing a boost. Despite a sluggish market for Lattice in Europe, the company is seeing bright opportunities with the LTE roll out. On the other hand, management of the company sees increase in demand after a seasonal weakness.

China Mobile is also making solid moves to enhance the LTE market in China and is spending about $13.5 billion. Also, China Mobile is expanding to 340 more cities by the end of 2014. This can be a great opportunity for Lattice as the demand for its chips is expected to be strong throughout the year.

Also, Lattice looks geared up to support 4G networks with the deployment of small cell wireless base stations. According to Lazard Capital Markets, Lattice's exposure at Cisco should enable the company to profit from small cell deployment.

New products to drive growth

Lattice’s strategy of launching new products in the market is a good indicator for the company as the new products are seeing good traction. Lattice is seeing continued contribution to the revenue from its new products' sales. Lattice is focusing on delivering cost-effective and efficient solutions to customers and this is probably a reason why it is seeing impressive adoption of its new products, leading to robust revenue growth.

Conclusion

Looking at the valuation ratios, Lattice appears expensive, but it has solid outlook for the future and moreover, its products are seeing traction in the market. Also, the projected five-year growth rate of the company looks promising. So, although Lattice looks expensive, investors should not mind paying a heavy premium for a high-flyer like Lattice.


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