
[ad_1]
Miscellaneous Photography
investment thesis
Lattice Semiconductor (NASDAQ:LSCC) is undoubtedly a high-quality business. I like the company’s focus on innovation, which has enabled it to deliver consistent revenue growth and display top-group profitability metrics. The balance sheet is solid, and the company also consistently repurchases its stock. But the valuation looks very generous. I consider the company’s substantial exposure to international markets to be a major risk in the current geopolitical tensions between the developed and developing world. Overall, I give Latisse a “Hold” rating.
Company Information
Lattice Semiconductor Corporation and its subsidiaries develop programmable logic semiconductor products, system solutions, design services and license related technologies.
The company’s fiscal year ends on December 31 with the sole operating segment. LSCC segregates revenue based on end markets. According to the latest 10-K report, the company generated 70% of its sales in Asia.
LSCC’s Latest 10-K Report
financial situation
Lattice has demonstrated impressive financial performance over the past decade. Revenue compounded at 8% CAGR, which is solid considering the ten-year horizon. As the business grew, the profitability metrics improved significantly. This is a good sign as rising margins suggest that management has been skilled at driving growth, and investors can expect further improvements in profitability metrics if the business continues to grow. In recent years, free cash flow [FCF] Margins go into double digits even with stock-based compensation [SBC] deductions have been made.
author’s calculations
The company reinvests substantial sales in innovation, which is a good sign for long-term investors. Lattice’s R&D to revenue ratio has consistently been above 20% over the past decade, which is huge. Management’s commitment to innovation means it strives to widen the company’s technological moat and build sustainable shareholder value. Overall, I like the company’s capital allocation balance between reinvesting in innovation, stock buybacks, and maintaining a healthy balance sheet. The company has a very low leverage ratio and is in a solid net cash position. Liquidity metrics are also in excellent shape.
looking for alpha
The current growth momentum is strong. The company reported ten consecutive quarters of double-digit year-over-year revenue growth, which is quite impressive in the challenging environment we’ve been experiencing since the start of 2022. The latest quarterly earnings were released on July 31, when the company topped consensus revenue and adjusted EPS estimates. Revenue saw solid growth of 17.8% year-over-year, and adjusted EPS expanded significantly from $0.42 to $0.52.
looking for alpha
The earnings for the upcoming quarter are scheduled to be released on November 2. The consensus expects revenue growth to decline significantly, though it is projected to display solid growth of 11% year-over-year. Adjusted EPS is expected to be flat sequentially at $0.52.
looking for alpha
Now, let me share my thoughts from the perspective of the bigger picture. First, let me start with the positive points. I like the company’s focus on innovation. I firmly believe that the most innovative companies win in the long term, and Lattice’s substantial R&D to revenue ratio speaks volumes for me. As a result of the company’s innovative approach, it has built a solid portfolio of offerings for diverse end markets. This diversification insulates the company from vulnerability to economic cycles and differentiates the company from competitors.
LSCC’s Latest 10-K Report
I also like the company’s stable and strong profitability metrics. The company’s ability to charge premium prices on its offerings is also thanks to the company’s cutting-edge technologies, which are coming to the fore due to substantial investments in innovation. Seeking Alpha Quant assigns the company an “A” profitability grade, meaning that Lattice is in the top group in the semiconductor industry in terms of profitability ratios.
From the perspective of “disadvantages”, I view the company as a relatively small-scale company. The company was founded forty years ago, in 1983, and has yet to reach $1 billion in annual sales, despite heavy investments in R&D. That said, the company competes directly and indirectly with the semiconductor giants, which have much larger resources and can invest much larger resources into innovation.
Evaluation
The stock is up 51% so far this year, outperforming the broader US market. Seeking Alpha Quant assigns the stock the lowest possible “F” evaluation grade due to its multiples, which are well above the sector average and mostly above historical averages. That said, from the valuation ratio perspective, the stock looks overvalued.
looking for alpha
I proceed on discounted cash flow [DCF] simulation. I use 10% WACC for discounting. I have revenue consensus estimates for the next three fiscal years and 10% revenue CAGR for the years ahead. I use the average of the last five years for FCF margin, which is 10.7%. I expect it to expand by one percent a year.
author’s calculations
By my calculations, the stock is worth about three times as much. The business is valued at $3.6 billion, much less than the current $13.4 billion market capitalization. The net cash position of LSCC will not help much in improving the fair value of the company. That said, the stock is overvalued.
considerable risk
According to the company’s financial statements, it generates only 14% of its sales in the United States. That said, the Company is exposed to significant risks related to international business. The most obvious risk is foreign exchange risk. Adverse movements in the foreign exchange market are highly likely to adversely affect the earnings of the Company. Relying heavily on international business also means that there is a risk that changes in international trade rules, regulations and tariffs could disrupt a company’s operations and earnings.
In FY2022, the company will generate 45% of its total revenue in China. In the current environment of rising geopolitical tensions between the US and China, the LSCC faces significant risks. Several American semiconductor companies were banned from selling some of their products in China. This could also be a big problem for Lattice, given the massive underperformance of sales in China.
ground level
I like the company’s fundamentals, but I’m not ready to buy at the current stock price. LSCC certainly deserves to be on long-term investors’ watch list, but the current stock price is well above fair value, even given the company’s strong market position and excellent profitability. The risks associated with international trade, and trade with China in particular, are substantial. In conclusion, I give a “Hold” rating to the stock.
Source: seekingalpha.com
[ad_2]