Bigger and more diversified is not always better. Intel's sprawling chip empire has proven that true in recent years as it has ceded market share to competitors like AMD on multiple fronts. The latest battle line? FPGA chips (field programmable gate arrays), a market AMD entered with a splash when it acquired FPGA leader Xilinx in February 2022.
But a small and laser-focused peer is making waves in this battle: Lattice Semiconductor (LSCC -1.28%). The small FPGA chip designer has been hot, up 46% in the last trailing-one-year stretch, as demand for its products races higher thanks to data centers, 5G mobile networks, automotive tech, and more.
With that said, here's a closer look at whether Lattice Semiconductor stock is still buy-worthy in 2023.
Lattice Semiconductor has had a strong run
Lattice Semiconductor's recent run higher is actually a continuation of a trend that really got rolling back in 2019. Current CEO Jim Anderson (a former executive at AMD) took over in 2018 and began cutting spending on non-core business projects. The result was a couple of years of stagnant revenue but rising profit margins as Lattice refocused its efforts on low-power programmable chip markets.
Lattice has, of course, gotten some help since then. Low power-hungry, high-performance processors for data centers, mobile networks, autos, and industrial robotics are in high demand. Lattice's revenue growth has picked up steam over the last couple of years, all the while enjoying the elevated profit margins that Anderson's cost-cutting initiatives from over four years ago helped enable.
Data by YCharts.
The FPGA market has been zooming along in high gear. AMD's Xilinx purchase, now reported as the company's "Embedded" segment, has also been benefiting. Although it hasn't provided specific numbers, even Intel has said its FPGA business (which it got via two acquisitions of its own, Altera and Omnitek) fared well in the last year and plans on expanding its lineup of designs. (Intel stopped reporting its "Programmable" chip results as a stand-alone segment in 2021).
Lattice reported a respective 31% and 74% year-over-year revenue and earnings-per-share growth in the third quarter of 2022. However, these growth rates are expected to moderate with the semiconductor industry in the middle of a slump. Management has forecasted revenue to be up "only" 27% in the fourth quarter of 2022. A further cooling off could be in store in subsequent quarters to kick off 2023. The company will report its final 2022 financial results and an initial outlook for 2023 on Feb. 13.
Is Lattice Semiconductor stock a buy for 2023?
As of this writing, Lattice Semi trades for 69 times trailing-12-month earnings per share (or 59 times trailing-12-month free cash flow). Shares trade for 33 times earnings per share on a one-year forward expectations basis. Clearly, the market expects Lattice's revenue and highly profitable operation to continue for the foreseeable future, chip industry downturn or not.
That premium price tag is keeping me from buying right now. If Lattice predicts a slowdown for 2023, its share price could come down significantly. After all, Lattice is a small business with some heavyweight competition from FPGA leader AMD as well as Intel. Startups have their eye on the growing programmable chip market, too, as industrial applications like data centers and automotive technology expand. Upstart FPGA designer Rapid Silicon recently got a $15 million cash infusion. Besides FPGA chips themselves, Rapid Silicon is also working on design software to make FPGAs easier to implement, since the specialized programming know-how a FPGA chip requires is often a prohibitive factor in their adoption.
That's not to say Lattice Semiconductor is about to get disrupted. This is a top player in the FPGA niche and the lone FPGA pure-play stock left standing. But a better discount on the stock might (finally) move me off of the sidelines. For now, I rank Lattice Semiconductor as a "wait-and-see" stock at the start of 2023, but keep this one on your radar.
