Despite its High Valuation, is Lattice Semiconductor a Buy?

Low power programmable leader Lattice Semiconductor Corporation (LSCC) develops and sells semiconductor products in Asia, Europe, and America. The company aims to allow its clients to accelerate their development process without losing performance or power through technology, long-standing relationships, and commitment to world-class support.

The company's shares have gained 74.1% over the past month and 21.2% over the past three months based on its positive earnings surprises over the past quarters. LSCC has surpassed consensus EPS estimates in the trailing four quarters.

In terms of forward non-GAAP P/E, the stock is currently trading at 76.6x, 204.4% higher than the industry average of 25.16x. Also, its forward Price/Book of 25.7x is 324.1% higher than the industry average of 6.06x. Moreover, LSCC's forward Price/Sales of 21.07x is 406.3% higher than the industry average of 4.16x. Though the company is currently trading at higher-than-industry valuation multiples, its robust financial performance over the past year should support the stock's rally in the coming months.

In addition, last month, its Board of Directors authorized a repurchase of up to an additional $100 million of its outstanding common stock through the end of December 2022. This exhibits LSCC's strong cash flow generating capabilities.

Here's what could shape LSCC' performance in the near term:

Industry Tailwinds

Though the current semiconductor chip shortage is affecting several industries worldwide, the semiconductor industry witnessed 27.6% year-over-year sales growth in the third quarter. Moreover, while the industry is experiencing production bottlenecks, increased corporate expenditures and government measures to alleviate the deficit should help it achieve a solid production recovery. The global semiconductor industry is expected to reach $778 billion by 2026, registering a CAGR of 7.7%.

New Product Launches

This month, LSCC launched the latest versions of its Lattice Automate solution stack for industrial automation systems, including additional real-time networking features, AI-based predictive maintenance, higher processor performance and scalability, and more flexible configurations. In addition, the company also announced the release of an updated version of the Lattice Propel embedded design environment, which improves speed and adds capabilities to handle RISC-V soft processor cores.

Strategic Acquisition

Last month, LSCC acquired Mirametrix, Inc., a software company focused on advanced artificial intelligence (AI) solutions for computer vision applications, through an all-cash deal. Adding Mirametrix's proven AI and computer vision technologies to LSCC's existing solution stack offering will make it even easier for its clients to add additional intelligence to their applications swiftly.

Strong Financials and Profitability

During the third quarter ended October 02, 2021, LSCC's revenue increased 4.8% year-over-year to $131.91 million. Its operating income grew 15.9% from the year-ago value to $27.01 million. The company's net income surged 22.4% from the prior-year quarter to $26.74 million, while its EPS increased 26.7% year-over-year to $0.19. In addition, its net cash from operating activities rose 68.3% for the nine months ended October 02, 2021, to $116.06 million.

LSCC's trailing-12-months EBITDA margin of 23.8% is 62.1% higher than the industry average of 14.4%. Also, its ROC, net income margin, and ROA are 93.4%, 171%, and 227.1% higher than the respective industry averages. Furthermore, its cash from operations of $138.7 million is 19.4% higher than the industry average of $115.91 million.

Impressive Growth Prospects

Street expects LSCC's revenues and EPS to rise 24.4% and 47.8% year-over-year to $507.67 million and $1.02, respectively, in the current year. Moreover, the company's EPS is expected to increase 47.4% in the current quarter and 22.7% next quarter. In addition, LSCC's EPS is expected to rise at a 15% CAGR over the next five years.

POWR Ratings Reflect Solid Prospects

LSCC has an overall grade of B, equating to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. LSCC has a B grade for Growth and Quality. The company's solid earnings growth estimates and profitability are consistent with these grades.

Of the 99 stocks in the A-rated Semiconductor & Wireless Chip industry, LSCC is ranked #41.

Beyond what is stated above, we have graded LSCC for Stability, Value, Sentiment, and Momentum. Get all LSCC ratings here.

Bottom Line

LSCC's strong top-line performance and commitment to sustainable business practices have boosted its earnings and revenue growth over the past few quarters. In addition, the company successfully beat analysts' earnings estimates in each of the past four quarters. So, given its impressive fundamentals and solid growth outlook, the stock could be a great pick now.

How Does Lattice Semiconductor Corporation (LSCC) Stack Up Against its Peers?

LSCC has an overall grade of B in our proprietary rating system. This rating is superior to its peers, FormFactor Inc. (FORM), Nova Measuring Instruments Ltd. (NVMI), and SUMCO Corporation (SUOPY), which have a C (Neutral) rating.

LSCC shares were unchanged in after-hours trading Wednesday. Year-to-date, LSCC has gained 70.01%, versus a 29.41% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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