Will This $6 Semiconductor Stock Outperform Once Again This Year?

Lattice Semiconductor (NASDAQ: LSCC  ) is not one of the better-known chipmakers, but it may be one worthy of investors' attention. It makes programmable chips that are sold to customers in various end markets, such as mobile, communications, automotive, industrial, etc. Lattice has key customers such as China Mobile (NYSE: CHL  ) and Cisco (NASDAQ: CSCO  ) on its client list, and it recorded gains of more than 40% in the last calendar year.But will the momentum continue in 2014?

Lattice shares spiked more than 20% in a day after the company posted terrific third-quarter results in October 2013. Revenue was up 23% over the prior-year period, and net income was $8.8 million, up from a loss of $2.2 million in the year-ago period. However, with an earnings multiple of almost 82, is Lattice still a good buy?

The company is slated to release its fourth-quarter results in the first week of February. Let's take a look at what's expected of Lattice and what its outlook may be moving forward.

On revenue and earnings
Analysts, according to Yahoo! Finance, expect Lattice to post revenue of $81.05 million, which would translate into an improvement of 23% from the year-ago period, if achieved. The company shouldn't have much difficulty in hitting this target, based on its own guidance. 

The mid-point of Lattice's revenue guidance was $81.1 million, in line with industry trends, but the year-over-year gains are still expected to be impressive, as we saw above.

Earnings are expected to come in at $0.04 per share, a massive improvement over the $0.06-per-share loss that Lattice had posted in the prior-year period.Given the massive improvement in revenue, it won't be a big surprise if Lattice manages to hit this target as well. In addition, Lattice has been recording robust improvements in its gross margin due to its cost-saving moves.  

Lattice has focused on making its production process more efficient, and it's transitioning to a 90-nanometer process from the 130-nanometer process.While this transition is expected to affect the gross margin slightly in the first half this year, the long-term gains should help make up for the short-term pain.

The outlook
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.

Moreover, Lattice's communications business has also seen a recent boost. Even though the communications market in Europe has been sluggish, the LTE rollout by China Mobile has helped Lattice perform well. Lattice management expects that the TD-LTE deployment by China Mobile will result in higher demand in the first three quarters of the new fiscal year, as vendors build up their inventory after a seasonally slow fourth quarter. 

China Mobile is looking to set up the world's largest LTE network and is expected to spend about $13.5 billion this year on this initiative. The telecom carrier is planning to cover 340 more cities by the end of 2014 with its LTE network; Lattice should see strong demand throughout the year. 

Additionally, Lattice is also positioned to gain from the deployment of small-cell wireless base stations that improve the capability of 4G networks. According to Lazard Capital Markets, Lattice's exposure at Cisco should enable the company to profit from small-cell deployment.Lazard Capital is of the opinion that Cisco's Ubiquisys acquisition -- which it completed last year for $310 million -- gives Lattice a good stronghold in this market. Ubiquisys had added around 70 customers to Cisco's portfolio, including the likes of T-Mobile, Google, SFR, and SoftBank.

What's more important is the fact that Lattice's new products are seeing good traction. Revenue from new products doubled to 46% of overall revenue in the first nine months of fiscal 2013, up from 20% in the prior-year period.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.

The bottom line
Lattice seems like a good bet even after its impressive performance last year. Its expensive trailing P/E ratio of 84 might put off conservative investors, but Lattice is reporting strong growth while peers such as Xilinx and Altera are nowhere near. Lattice's prospects are also looking good in its two main businesses -- consumer and communications -- and should help it turn in a strong performance this year as well.

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