Shares of small chip designer Lattice Semiconductor (LSCC 3.25%) have been on an absolute tear the past five years. The stock is up well over 1,400% since the beginning of 2018 -- including a nearly 40% jump so far in 2023. I'm wallowing in self-pity, because I've been eyeing the stock all along and keep talking myself out of buying.
Lattice isn't exactly a household name, but it's been around for decades and competes in an important chip type that AMD (AMD 1.33%) and Intel (INTC 1.77%) work on, both by acquisition. Lattice keeps putting up strong growth and has a new pipeline of products in the works. Is it finally time to buy?
FPGA what?
Lattice is one of the original developers of field programmable gate arrays (FGPAs) along with Xilinx (part of AMD since early 2022) and Altera (acquired by Intel in 2015). In fact, though its revenue pales in comparison with those of its peers, Lattice CEO James Anderson has said the company is the leader in this chip type as far as sheer volume of FPGAs sold goes. Lattice sells a high volume of low-power FPGAs historically used in small applications ranging from communications infrastructure to automotive and consumer electronics to factory equipment.
FPGAs have been in high demand the past few years. As Anderson recently explained at an investor conference, customers are interested in designing hardware once, and then being able to adapt it over time using software updates -- that's where the "programmable" comes from in "field programmable gate array." A number of non-tech industries like automotive and manufacturing are suddenly in need of high tech to keep pace with the times, and Lattice offers a low-cost chip alternative complete with software design and programming packages to make adoption of their hardware a cinch -- or as close to a cinch as chip implementation can get.
Expanding into new frontiers and looking to displace incumbents
Lattice has also been broadening its FPGA portfolio into new arenas beyond its historical small-chip applications. These larger, more general-purpose computing chips, a family that Lattice calls Nexus, can be used in data centers and big business servers, artificial-inteligence systems, 5G wireless and related network infrastructure, and the like. This is typically the domain of competitors Xilinx (AMD) and Altera (Intel). More product launches in this department are coming over the next couple of years.
In addition, those industrial applications like auto and manufacturing where Lattice has dwelled in the past are expanding. And because of this rapid expansion, customers are in need of some flexibility. Anderson has said this has opened the door for FPGAs to replace microcontroller chips -- putting Lattice in a disruptor position of markets dominated by the likes of Texas Instruments, Microchip Technology, NXP Semiconductor, and the like.
A top buy for the decade ahead?
Of course, I'm not here presenting Lattice as a complete disruptor of the chip industry as we know it. FPGAs aren't new technology. And semiconductors overall are a secular growth trend, one that is enjoying a resurgence in investment interest as so many industries realize they're in dire need of infrastructure upgrades in the wake of the pandemic.
In other words, this rising tide will lift many boats, and only one of those boats will be Lattice Semiconductor.
Lattice's growth has nonetheless been impressive. After growing revenue and earnings per share (EPS) a respective 28% and 65% in 2022, management expects revenue to grow at least another 17% year-over-year in Q1 2023. That stands in stark contrast to the flat to declining year-over-year growth many other semiconductor companies are experiencing at the moment.
It also looks as if Lattice's profit margins will continue to rise. Indeed, it hasn't just been sales growth that's been key to its expansion the past five years. Rising sales and profit margins have led to an explosion in EPS for shareholders. As long as Lattice keeps anticipating this dual tailwind, it's hard to bet against the stock for too long.
Data by YCharts.
That being said, Lattice does trade for a premium price tag: 70 times trailing 12-month EPS, or 61 times trailing-12-month free cash flow. It's an expensive price tag that has held me up from making a purchase for years, an obvious egregious mistake in hindsight. I think it's time I just take a nibble, and nibble some more if a dramatic pullback occurs.
Lattice Semiconductor is a small little-known chip name, but it deserves to be on tech investors' watchlists.
