Capitalize on the NASDAQ's Plunge With This Tech Stock

This high-growth tech stock has become cheap after last Friday's NASDAQ drop.

Apr 7, 2014 at 11:30AM

Last Friday, the NASDAQ plunged the most in a single day since June 2012. The broad market sell-off led to significant one-day declines in marquee tech stocks such as Google, Facebook, Yahoo!, etc as investors booked profits in these tech winners. Amid the mayhem, there was one little-known semiconductor company -- Lattice Semiconductor (NASDAQ:LSCC) -- that fell 7% last Friday, giving investors a big opportunity to initiate a long position in a potential winner.

Lattice, which makes programmable chips, looked like an outperformer last year and it has certainly delivered. The stock's up close to 70% in the last six months, but it hasn't run out of fuel yet as China Mobile (NYSE:CHL) and Cisco (NASDAQ:CSCO) should lead to further gains.

Delivering solid results
When Lattice came out with its fourth-quarter results a couple of months back, its shares soared on the back of some hugely impressive numbers. Lattice's revenue was up 36% year-over-year, while net income came in at $0.06 a share as compared to a loss of $0.06 per share last year. The revenue outlook of $87.71 million to $91.29 million was also well-ahead of the $83.25 million consensus.

The sell-off in recent days has brought down Lattice's trailing earnings multiple to just 40. This looks very reasonable given the company's growth, and investors shouldn't miss this opportunity as it is making robust progress.

Product innovation the key to growth
Lattice's new products have gained solid traction of late. In fact, in 2013, Lattice saw a 145% jump in new product revenue from the preceding year. Lattice's focus on making the best field-programmable gate arrays, or FPGA, seems to be bearing fruit as they are gaining traction in the consumer, industrial, medical, and scientific markets.

Lattice has focused on making small, affordable, and ultra low-power FPGA's, thus driving their adoption in the mobile market. These chips give consumers the flexibility of programming the chips as per their wishes after being bought off the shelf, and the small form factor has certainly helped the company increase its addressable market. Now, going forward, Lattice management sees some good opportunities in smartphones, tablets, or anything with a battery as the Internet of Things gains steam.

Cisco's role
The Internet of Things, or IoT, is a Cisco concept, where the networking behemoth imagines that everything from an alarm clock to a coffee machine is connected. Cisco projects that there will be 50 billion connected objects online by the end of the decade, and these should increase the addressable market of Lattice's small-sized FPGA's.

Lattice's relationship with Cisco runs deeper than the IoT. According to Ian Ing of Lazard Capital Markets, Lattice has been benefiting from the deployment of small-cell wireless base stations by Cisco. Ing is of the opinion that Lattice has got good exposure at Cisco's Ubiquisys, which was acquired last year.

Cisco has developed the small cell wireless backhaul ecosystem to address the rising demand for network capacity. According to Cisco, telecom carriers are extensively testing backhaul solutions to deploy small cells in different areas, and the networking bellwether's solution will assist them in doing the same. To support the growth in data traffic, 1.5 million to 2 million outdoor small cells are expected to be installed by 2017, indicating that a strong market lies ahead for both Cisco and Lattice.

LTE goodness
Lattice's communications business is also being driven by the build-out of LTE in China by China Mobile. Last year, Lattice management had projected that demand for its solutions would increase in the first three quarters of the current fiscal year as vendors build up their inventory. The effects of this build-out can already be seen in Lattice's outlook for the first quarter.

This year, China Mobile plans to build 500,000 base stations across 340 cities in China. In addition, China Mobile will also focus on boosting the speed and efficiency of its network through LTE-Advanced. Moreover, China Mobile also plans to purchase more than 100 million LTE terminals this year as it aggressively deploys the service. Hence, the infrastructure build-out by China Mobile has already started showing up in Lattice's results, and more upside can be expected as the year progresses.

The takeaway
Lattice Semiconductor has outperformed the market this year and the company's prospects suggest that it isn't done yet. In addition, Lattice has a rock-solid balance sheet with no debt and a good cash position, while a forward P/E of less than 20 seems less for a company that's growing at a brisk pace. All this makes Lattice an enticing proposition and the recent weakness in the share price gives investors an attractive point of entry.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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