Cisco and Google Can Take This Hot Tech Stock Higher

This tech stock has been growing rapidly, and it has some really good catalysts in store.

May 13, 2014 at 11:00AM

Lattice Semiconductor (NASDAQ:LSCC) is one hot stock that you shouldn't miss. The maker of programmable chips is on a terrific run, driven by customers such as Cisco (NASDAQ:CSCO), China Mobile, and potentially Google (NASDAQ:GOOGL) (NASDAQ:GOOG). The stock price has also tagged along nicely with Lattice's terrific financial performance, shooting up around 44% so far in 2014. There was a minor blip early in April when the broad market sell-off took Lattice down, but that was more of an opportunity.

Showcasing rapid growth
When Lattice reported its first-quarter results in the last week of April, the company showed investors why it should be bought on pullbacks. Lattice shares leapt 8% after the company delivered solid results. Revenue was up 36% year over year to $97 million, while the bottom line jumped five-fold to $0.10 per share. The company's results were miles ahead of analysts' expectations of $89 million in revenue and EPS of $0.06. 

Lattice is on a dream run and its performance has been much better than industry peers Altera and Xilinx. Now, almost all companies in this industry have identical growth drivers, and they count both Cisco and China Mobile as clients. So, it all comes down to the product differentiation and efficiency that each company delivers to its clients in this industry.

So far, Lattice has done quite well for itself in this regard, which is why its revenue and earnings have been growing at a robust pace compared to peers. Its new products have gained solid traction, as revenue from new products in the first quarter increased more than 23% year over year. In addition, Lattice's revenue from legacy products was down 8% year over year. 

Product innovation to drive growth
Lattice's new products, such as iCE40 and ECP3, were in good demand in the consumer and communications end markets. Now, Lattice is working on a next-gen product, the ECP5 device, to keep its growth streak intact. The company has managed to multiply its single design wins at certain large OEM customers into multiple design wins across different platforms. As Lattice is continuously looking to innovate and accelerate the time to market for its customers, its solutions are being readily adopted.

It is because of such characteristics that Lattice has gained good ground with key customers such as Cisco and Google. On the previous conference call, management cited the Internet of Things as a major growth opportunity. This is not surprising, as Cisco has placed a $19 trillion figure on the potential of the Internet of Things by 2020, and the networking behemoth is now investing in start-ups to implement this concept. 

Cisco recently announced that it will be investing $150 million in early stage companies over the next three years as it looks to accelerate adoption of the Internet of Things. Since Cisco is now going all-out to connect various objects to the Internet, it is quite possible that the number of things connected to the Internet by 2020 might hit 212 billion, as predicted by IDC.

Given the huge number of devices that are expected to connect to the Internet in the coming years, the need for programmable chips should increase. This would lead to an increase in the addressable market for Lattice going forward.

The potential of Project Ara
Google is working on an ambitious plan to deliver the world's first modular smartphones for consumers, dubbed Project Ara. According to Paul Eremenko, the head of Project Ara, Google is trying to "lower the barrier-to-entry to the smartphone hardware ecosystem" through this venture. According to the Project Ara website, Google is targeting 5 billion people who don't yet have a smartphone, which could be a huge opportunity for Lattice. 

Ara will allow consumers to design their own smartphones, and the tech giant has chosen Lattice's field programmable gate arrays, or FPGAs, for its first prototype and reference module implementations. Google stated that is has selected Lattice because its FPGAs meet critical size, power, and performance requirements, apart from simplifying and speeding up development of the project's modules. 

Worth the premium
This is how Lattice is looking to differentiate itself from peers such as Xilinx and Altera. However, if you are keen on an investment in Lattice, be prepared to pay a premium. The stock trades at 29 times last year's earnings, more than Xilinx's multiple of 22 and Altera's 24. However, Lattice is the fastest-growing company of the lot, as far as its financials are concerned. So, the stock is worth the premium.

In addition, the company's new products are on a roll, and with big opportunities such as Project Ara and the Internet of Things ahead, Lattice's rise should continue.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Google (A shares). The Motley Fool owns shares of Google (A shares). 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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