Lattice Semiconductor Corp: Navigating Market Trends

Introduction:

Name: Lattice Semiconductor Corp
Ticker: LSCC
Sector: Information Technology
Industry: Semiconductors & Semiconductor Equipment
Market Cap: Large $ 10.52 B
Eyestock Rating: 145%

Background and Overview:

Lattice Semiconductor Corporation is a company specializing in programmable logic devices (PLDs), field-programmable gate arrays (FPGAs), and related development software. Its business model revolves around providing customizable semiconductor solutions to a diverse range of industries and applications.

Here’s an overview of Lattice Semiconductor’s business model:

• Lattice Semiconductor manufactures low-power programmable semiconductors utilized across numerous industries
• Customization and Flexibility: One of the key aspects of Lattice Semiconductor’s business model is offering programmable solutions. Their products can be changed after being used, unlike traditional circuits. This helps customers adjust to new needs or improve their designs.
• Targeted Market Segments: Lattice Semiconductor targets a diverse set of market segments including communications, computing, industrial, automotive, and consumer electronics. By catering to multiple industries, the company diversifies its revenue streams and reduces dependence on any single market.
• Ecosystem Partnerships: Lattice Semiconductor collaborates with ecosystem partners including hardware vendors, software developers, and design service providers. These partnerships help companies reach more customers and offer complete solutions that easily fit into their workflow processes.
• Support and Services: The company offers technical support, documentation, and training services to assist customers in the design, implementation, and deployment of their solutions. This support is crucial for ensuring customer satisfaction and fostering long-term relationships.
• Global Presence: Lattice Semiconductor operates globally, serving customers in various regions around the world. This global presence allows the company to tap into diverse markets and leverage different economic conditions and industry trends.
• Revenue Streams: Lattice Semiconductor generates revenue through the sale of semiconductor devices, development software, and related services. Additionally, the company may also derive income from licensing intellectual property (IP) or partnering with other companies for joint development projects.

The main value proposition from LSCC is the following:

• Small Size
• Low Power
• Highest Security
• Reliable design 
• Ease of use

The main products are: a portfolio of different semiconductors (FPGA), Software and Solutions in the sphere of:

• Computer vision
• Design software
• ML Frameworks
• Cryptography
• Factory Automation
• 5G and data transmission
• Automotive Design

Field-Programmable Gate Arrays (FPGAs) are integrated circuits (ICs) that are programmable by the user after manufacturing. FPGAs are flexible and can be changed for different tasks even after they are used in a system.

Let’s conduct a Porter’s Five Forces analysis for Lattice Semiconductor Corporation (LSCC):

• Threat of New Entrants:
  • Low to Moderate: The semiconductor industry requires significant capital investment in research and development, manufacturing facilities, and intellectual property. Additionally, established companies like Lattice Semiconductor have strong brand recognition, extensive customer relationships, and a wide range of proprietary technologies.
• Bargaining Power of Suppliers:
  • Moderate: Lattice Semiconductor relies on various suppliers for raw materials, components, and manufacturing equipment. While there are multiple suppliers available, certain critical components may have limited alternative sources or high switching costs. However, the relatively high volume of semiconductor production industry-wide can give Lattice Semiconductor some bargaining power with suppliers.
• Bargaining Power of Buyers:
  • Moderate: Lattice Semiconductor’s customers, which include original equipment manufacturers and distributors, may have some bargaining power due to the availability of alternative suppliers in the semiconductor market.
  • However, switching costs associated with changing FPGA vendors or redesigning products may mitigate the buyers’ power to some extent.
  • Additionally, Lattice Semiconductor’s focus on providing customizable solutions and strong technical support can enhance customer loyalty and reduce their willingness to switch suppliers.

• Threat of Substitutes:
  • Low to Moderate: While there are alternative semiconductor technologies and competitors offering similar products, the unique capabilities of FPGAs and PLDs, such as reconfigurability, parallel processing, and flexibility, make them difficult to substitute directly. However, advancements in alternative technologies, such as application-specific integrated circuits (ASICs), system-on-chip (SoC) solutions, and software-defined architectures, could pose a threat if they offer superior performance or cost advantages.
• Competitive Rivalry:
  • Moderate to High: The semiconductor industry is highly competitive, with numerous companies competing globally. Lattice Semiconductor faces competition from major players like AMD (Xilinx), Intel (Altera), and Microchip (Microsemi), as well as smaller niche players. Intense competition in terms of product features, performance, pricing, and time-to-market pressures exists within the FPGA and PLD market segments. However, Lattice Semiconductor’s focus on specific market segments, innovative product offerings, and customer support may help differentiate it from competitors.

Overall, while Lattice Semiconductor benefits from its strong position in the FPGA and PLD market segments, it faces challenges related to competitive rivalry, technological advancements, and potential shifts in buyer preferences. Managing these forces effectively is crucial for sustaining its competitive advantage and long-term success.

The company diversifies its revenue streams as follows: 35% from communications and computing, 59% from industrial & automotive, and 6% from consumer sectors

Buyers from different regions and sectors diversify the LSCC`s revenue. This makes the LSCC more competitive and open to further growth.

Lattice Semiconductor Corp`s Financial Performance:

Lattice Semiconductor Corp boasts a high Eyestock rating of 145%, making LSCC stock an appealing investment opportunity. Eyestock rating is designed to enable individual investors to make informed decisions.

According to the Q4 financial statement report, LSCC generated $170.60 million in revenue, with a cost of sales of $51.65 million, resulting in a solid gross profit of $118.95 million and a gross profit margin of 69.70%, indicating economies of scale.

Notably, the gross profit margin has increased from 59.20% in 2020 to 69.70%. The total operating expenses are $75.32 million.

In Q4, net income stood at $98.71 million, surpassing the operating profit of $43.63 million, primarily due to a provision for income taxes amounting to -$53.30 million.

Here is an excerpt from the LSCC 10-K report explaining the situation:

Through the end of fiscal 2023, we demonstrated consistent and continued profitability over the preceding three-year period. In assessing the realizability of the deferred tax assets, we considered our operating environment and estimates regarding our ability to generate taxable income in future periods within the United States.

As a result, in the fourth quarter of fiscal 2023, we concluded that our history of profitable operating results, including the current period results, along with our expectations about generating sufficient U.S. Federal taxable income, provided sufficient positive evidence supporting the realizability of our U.S. Federal deferred tax assets. Accordingly, we reduced the valuation allowance against a significant portion of our U.S. deferred tax assets resulting in the inclusion of $56.9 million of U.S. Federal deferred tax assets on our Consolidated Balance Sheets

Cash flow statement analysis shows that the quality of earnings is very high due to its ratio cash flows from operations divided by Net income equal to 104%.

Lattice Semiconductor Corp`s Financial Position:

Lattice Semiconductor Corp wrapped up the 2023 financial year in stellar shape. With assets climbing to $840.89 million and equity reaching $692.02 million, coupled with the absence of any debt, key financial ratios like debt/equity at 0.06, current ratio at 3.67, and cfo/debt at 7.30, and with retained earnings $147.97 million paint an enticing picture. These figures suggest that the company is both solvent and liquid in both the short and long term, making it an attractive prospect for investors.

Lattice Semiconductor Corp`s Efficiency:

Lattice Semiconductor Corp is showing robust efficiency with impressive returns on assets (ROA) at 33%, returns on equity (ROE) at 57%, and returns on invested capital (ROIC) at 42%, alongside a reasonable and effective financial leverage ratio of 1.31. Since 2020, all these returns have nearly tripled, reflecting the company’s strong performance and effective utilization of resources.

Valuation:

Let’s discuss the LSCC stock’s current valuation, considering metrics Price-to-Earnings trailing (P/E) ratio 37.21 being the lowest over 5 years, Price-to-Earnings forward (P/E forward) ratio 40.78 We believe that the current stock price of LSCC at $75.77 per share undervalues the company.

Opinion:

LSCC is part of our stock collections TOP 20 US Companies and Super Stable US Companies. Lattice Semiconductor Corporation stands to benefit from several emerging market trends:

• Firstly, the automotive industry is rapidly embracing driverless technology, and LSCC’s advanced AI technology in computer vision positions it as a key player. Companies like Tesla (TSLA) and Chinese competitors such as BYD (002594.SZ) are leading this charge, potentially opening up new opportunities for LSCC beyond its current client base, which includes Ford and Mitsubishi.
• Secondly, Lattice is effectively addressing challenges in data centers by providing low-power components for hardware acceleration, storage cards, GPU cards, motherboards, network cards, and secure control modules. Major data center operators like AWS (AMZN), Microsoft (MSFT), and Google could find Lattice’s technologies appealing.
• Thirdly, the trend of relocating manufacturing capacities from China back to the USA, driven by the deglobalization process, presents significant industrial challenges. These challenges include functional safety, touchless control, predictive maintenance, object identification, collision avoidance, sensor bridging, and motor control — all areas where Lattice Semiconductor has established expertise.
• Fourthly, the widespread adoption of 5G technologies is another significant trend. Established telecom companies worldwide are eager to participate in the 5G wireless technology market. This represents a huge potential market for FPGAs necessary for switches and routers, which are essential components of 5G infrastructure. Lattice Semiconductor is well-positioned to capitalize on this growing demand for its FPGA solutions.

Risks Associated with LSCC.

The increasing Cash Conversion Cycle up to 168 days is a concern. A faster Cash Conversion Cycle typically indicates a more stable company. However, it’s not currently a major problem. The combination of Days Sales Outstanding, which rose from 49 days in 2022 to 56 days in 2023, and Days of Inventory on hand, decreasing from 187 days in 2022 to 175 days in 2023, indirectly suggests that the company may not be able to fully capitalize on all the positive market opportunities immediately.

Conclusion:

LSCC stock presents an enticing opportunity for value investors, given its robust financial position and great financial ratios and relative historical undervaluation. Additionally, growth investors have reason to be excited. Once the market recognizes the potential impact of emerging trends such as driverless automotive technology, data center advancements, manufacturing relocation, or the 5G transformation, LSCC stands poised to shine.