Superb Execution And Growing FPGA Usage Driving Lattice Semiconductor To New Heights

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The Lattice Semiconductor (NASDAQ:LSCC) rocket vessel is soaring ever higher, climbing almost 70% since my past update (in November!), arsenic nan institution continues to execute exceptionally well, while besides leveraging beardown underlying maturation successful FPGA demand. With microcontrollers (or MCUs) still capacity constrained, increasing usage cases for separator processing (particularly successful situations wherever debased powerfulness depletion is invaluable), and Lattice continuing to move nan shot guardant successful position of merchandise and package design, almost everything is going nan company’s way.

Valuation is beautiful overmuch a pointless speech now. I can’t really find a discourse successful which Lattice is cheap, different than to statement that nan institution continues to transcend lofty expectations, while besides expanding its addressable market.

A “Bad” Quarter That’s Still Very Good

One of nan hallmarks of awesome maturation stories is that they’re practically immune to macro pressures. Not only did Lattice not spot nan sequential gross diminution that galore fantabulous semiconductor companies saw, I don’t deliberation they’re going to spot immoderate sequential shrinkage done this shape of nan cycle. Low single-digit maturation whitethorn beryllium arsenic bad arsenic it gets, arsenic nan institution continues to use from beardown marketplace dynamics and its ain merchandise creation and marketing/commercialization efforts.

Revenue roseate 24% twelvemonth complete twelvemonth and 2% 4th complete quarter, coming successful conscionable up of sell-side expectations. Gross separator improved almost 5 points from nan year-ago 4th and 50bp sequentially, reaching 70% (for those who don’t routinely travel semiconductor companies, this is exceptionally high). Operating income roseate 52% yoy and 3% qoq, pinch operating separator rising 730bp yoy and 50bp qoq to 40.2%.

Inventory days did jump successful nan 4th (up astir 65 days yoy and 28 days qoq to 187 days), but that is simply a byproduct of nan request to negociate (build) inventories up of a wider motorboat of its caller mid-range Avant products and to support increasing usage of its products successful caller applications.

Auto and Industrial income were exceptionally beardown astatine +51% yoy and +4% qoq, outperforming peers successful nan analog space. Auto request continues to beryllium driven by infotainment, ADAS, and sensor aggregation, while nan institution sees beardown business request from automation, instrumentality vision, and robotics. Communications and Computing grew 15% yoy and shrank little than 1% qoq, pinch immoderate near-term weakness successful servers and PCs. Consumer declined 17% yoy but roseate 2% qoq; this is simply a astonishing coagulated consequence fixed nan weakness successful user IoT/smart location flagged by companies for illustration NXP (NXPI) and Silicon Labs (SLAB), but contented wins could easy explicate nan outperformance.

So, What’s Going On?

I judge location are aggregate drivers of Lattice’s success, astir of which support a beardown ongoing multiyear maturation story.

Starting pinch what whitethorn beryllium nan shortest-lived driver, I judge Lattice could good beryllium picking up business astatine nan disbursal of capacity-constrained MCU manufacturers for illustration Microchip (MCHP) and NXP. Auto MCU lead-times stay highly elevated and NXP has said they’re fundamentally sold retired of MCUs for car applications done nan extremity of 2023. While I person nary uncertainty that Lattice is winning car sockets meant for its low-power FPGAs, it’s astatine slightest plausible to maine that customers are opting to usage these chips arsenic a impermanent stop-gap for MCU shortages.

While that is simply a threat down nan roadworthy (as MCU capacity ramps up), aggregate MCU manufacturers person suggested that capacity constraints could past for years, arsenic companies are reluctant to build capacity of their ain and foundries aren’t prioritizing nan older nodes wherever astir of these MCUs are made.

A stronger driver is simply nan capabilities of FPGAs comparative to different options. In edge-based imaging (like information cameras, instrumentality vision, beingness detection, et al), FPGAs tin process images overmuch much quickly as, for illustration GPUs, they tin do parallel processing. That velocity is captious for applications for illustration scanning a fast-moving assembly statement aliases trying to seizure and process faces successful a crowd aliases licence plates connected a highway, and accepted processors are excessively slow. On nan different hand, GPUs are power-hungry, making FPGAs a much businesslike action erstwhile nan processing capabilities are similar.

I besides judge that an underrated facet of nan Lattice communicative is nan effort spent by nan institution to create package tools. FPGAs person ever been appreciated for their elasticity and reprogrammability (the FP intends “field programmable”), but programming them tin beryllium a very analyzable task. With a suite of devices designed successful conjunction pinch their chips (and pinch an oculus toward circumstantial tasks), I judge Lattice has importantly reduced nan load of utilizing their chips successful spot of MCUs aliases different options.

Now pinch nan institution astir to motorboat Avant, its caller mid-range merchandise (built connected 16nm FinFET w/ TSMC (TSM)), nan institution is fundamentally doubling their addressable marketplace and moving much toward Microchip’s wheelhouse successful mid-range FPGAs. I’d besides note, though, that nan institution has been winning immoderate slots successful areas for illustration endeavor networking that you’d typically deliberation would beryllium nan territory of Intel’s (INTC) aliases AMD’s (AMD) high-end FPGAs. I’m not suggesting that Lattice is moving into high-end FPGAs, but alternatively that usage cases are expanding to a constituent wherever they’re seeing wins successful marketplace categories wherever low-range FPGAs haven’t historically seen overmuch traction.

The Outlook

Business has continued to create beautiful overmuch arsenic I’d hoped, truthful I’m not really changing overmuch successful my model. I’m looking for 16% gross maturation adjacent year, putting maine adjacent nan apical of nan sell-side estimate range, and my 20% maturation estimate for FY’24 has maine astir 5% supra nan highest published sell-side estimate today. Longer term, I’m looking for mid-teens gross arsenic use-cases for low-range and mid-range FPGAs proceed to look and grow crossed auto, industrial, communications, and computing end-markets and arsenic Lattice continues to summation share.

I’ve modestly tweaked my separator assumptions higher, but not by what I’d see a worldly amount, and I’ve adjusted immoderate of my moving superior assumptions (which impacts near-term FCF). As acold arsenic halfway assumptions go, thing has changed – I’m still expecting low-to-mid-30%’s adjusted FCF margins complete time, driving precocious teens annualized FCF maturation complete nan adjacent decade-plus.

Valuation is … problematic.

Lattice already trades supra nan multiples wherever Altera and Xilinx were taken retired (and I expect Lattice to scope nan size Altera was erstwhile it was bought retired during mid-FY’25). Lattice besides trades beyond nan 42.5x guardant EPS aggregate wherever Marvell (MRVL) acquired Inphi, a fast-growing interconnect master that dominates nan PAM-4 market. Relative to my ain estimates, Lattice trades conscionable nether that 42.5x guardant P/E aggregate (42.2x), and astir 17x my guardant gross multiple.

Maybe location are comps present that I’m forgetting astir aliases not alert of, but I can’t deliberation of excessively galore scenarios of valuations supra and beyond this. I afloat assistance that Lattice is simply a typical lawsuit and that nan marketplace opportunity for low-power FPGAs successful a world of increasing automation and electrification is huge, but I conscionable can’t necktie this backmost to immoderate benignant of reasonable aggregate aliases valuation framework.

The Bottom Line

Sometimes, each now and then, you spot a institution that breaks nan rules and you conscionable person to thrust pinch it. I can’t dress that I don’t wish I’d gone up and bought shares backmost successful November, and I whitethorn deliberation nan aforesaid point astir today’s value successful different six months. I emotion nan underlying basal communicative astatine Lattice and I’m not prepared to telephone a top; valuation seems very stretched, but I cognize nan marketplace will salary dearly for this benignant of maturation story. Personally I’ll hold for different pullback, but I whitethorn not get nan opportunity I want, and that’s conscionable really it goes erstwhile you effort to put pinch immoderate semblance of value/price discipline.

Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.