Lattice Semiconductor Not Immune To A Semiconductor Slowdown, But The Quality Is Still There

Having been bullish on Lattice Semiconductor (NASDAQ:LSCC) back when management launched a turnaround that has driven revenue acceleration and margin expansion beyond even what bulls believed possible, I've also spent a few articles lamenting how the shares ran away from me. While the stock has continued to outperform the SOX index (down 19% versus down 32% since my last update on Lattice), the pullback has at least made the valuation a little more reasonable.

When I say "reasonable", I do mean reasonable in the context of a growth stock. These shares aren't cheap on any reasonable multiples-based approach, unless you try to look at what the market has in the past been willing to pay for growth stories like Altera, Cavium, Inphi, Nvidia (NVDA), or Xilinx. I do believe Lattice can generate the sort of mid-to-high-teens growth that can support such hefty multiples, and I think these shares are worth a look from growth-oriented investors who can accept the risk that growth slows more sharply here and/or simply can't match the level of investor expectations baked into the price today.

 

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Lattice Semiconductor Not Immune To A Semiconductor Slowdown, But The Quality Is Still There

Lattice Semiconductor Continues To Tear It Up With Strong Execution

Given that the SOX is still down about 10% on a year-to-date basis, maybe it’s time to check in with Lattice Semiconductor (NASDAQ:LSCC) and see if investor nervousness about the semi cycle and peaking lead-times has led to a sustained sell-off in this great growth stock.

Yeah … no.

Although the shares are down about 25% from their November peak, Lattice shares are up another 30% or so since my last update. Fueled by incredibly strong momentum in its core lower-range FPGA business and very good ongoing execution, there’s really nothing to fault here other than the valuation, and even I’m willing to acknowledge that special growth stories fall into their own bucket where “fair value” is concerned.

 

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Lattice Semiconductor Continues To Tear It Up With Strong Execution

Lattice Seeing Revenue Acceleration And Moving To Double Its Addressable Market

The Lattice Semiconductor (LSCC) story continues to work, particularly with revenue accelerating nicely in the first quarter and management offering a credible outlook for mid-teens or better growth over the next three to four years. I have had my qualms about paying such a rich price for this stock (currently trading at around 15x expected 2021 revenue), but the shares have continued to outperform the broader semiconductor sector so far this year.

I know some investors were hoping for more operating margin leverage in management’s recent Analyst Day guidance, but I do think the company’s decision to continue investing in R&D and expand into the mid-range FPGA market is a good one for the long-term. I can’t, and won’t, defend the valuation, but I believe the underlying quality of the company and the growth story remain good.

 

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Lattice Seeing Revenue Acceleration And Moving To Double Its Addressable Market

Lattice Semiconductor - Growth, Margin Leverage, And Scarcity Value

 

Lattice Semiconductor (LSCC) shares have looked slightly mortal of late, with the shares up another 10% since my last update (and almost flat a week ago) but lagging the SOX by more than 10%. Nothing has really changed with the business, if anything the bullish arguments are a little stronger, but a very high valuation is a threat, particularly if the tech sector swoons again or the semiconductor sector starts to correct on worries of eventual normalization of lead times.

I still love the company and the opportunities here – the company’s dedication to the low-power FPGA space is leading to demonstrably superior products that deliver real value for users, and as edge applications grow, I expect even more share gains to come, as well as more margin leverage. I’d also note a scarcity value premium here. Not only is Lattice the only meaningful public FPGA pure-play left, it’s also a quality growth name in the mid-cap chip space, and after a multiyear wave of M&A, there aren’t so many of those left anymore.

This remains a “love the company, can’t get comfortable with the stock” situation. Valuation already looks unhinged from the fundamentals to me, so I could just as easily argue for a price 20% higher or 20% lower than today’s price.

 

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Lattice Semiconductor - Growth, Margin Leverage, And Scarcity Value

Lattice Semiconductor Doing Exactly What It Said It Would, And Thriving For It

Since my last update on low-power FPGA specialist Lattice Semiconductor (LSCC), the company has continued its winning ways and the shares have outperformed the SOX index by close to 15%. Lattice’s story remains focused on bringing low-power FPGA capabilities to markets that have historically not used FPGAs, offering customers enhanced performance and value over traditional alternatives like microcontrollers and systems-on-a-chip (or SoC).

At this point I believe the company is only at the beginning of a significant ramp into opportunities like factory automation, machine vision, data center, 5G, and auto ADAS. The primary issue remains valuation. While I believe there is a point with growth stock investing where you have to take a longer-term view of valuation drivers, expectations here are already high for a company that hasn't actually grown much in recent years. Low-to-mid-teens revenue growth and long-term adjusted FCF margins in the mid-20%’s can support a high single-digit return from here, but clearly this is not an unappreciated opportunity.

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Lattice Semiconductor Doing Exactly What It Said It Would, And Thriving For It

Lattice Semiconductor Delivering Early On Several Key Promises

Up another 55% or so from my last update and 250% from my first Seeking Alpha article on the company, Lattice Semiconductor (LSCC) is a great go-to example of my investment philosophy that successful turnarounds can produce returns significantly ahead of what might seem fair or reasonable at the start of the process. Over the last two years, Lattice has not only turned over management and embraced a significantly different operating philosophy, it has delivered meaningful improvements in margins - one of the key drivers for semiconductor valuation.

I don't really think of Lattice as a turnaround anymore, as I believe the company is firmly in the midst of a transition to a growth story. In addition to opportunities in the data center and 5G base stations and auto driver assistance, I'm eager to see what the company will accomplish with its new FD-SOI platform and its AI-focused SensAI software stack.

As a growth story, I'm not quite as worried about valuation, but it is nevertheless hard to call Lattice "cheap". The shares already anticipate significant margin improvement and future revenue growth, and it's tough to make the numbers work.

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Lattice Semiconductor Delivering Early On Several Key Promises

Microchip Technology Bumps Along The Bottom

I’ve been writing for a little while now that I thought the semiconductor rally was ahead of itself, and that between ambitious expectations for a second half bounce, high inventories, shrinking lead-times, and ongoing uncertainty with trade relations with China, there were a lot of factors in play that could blunt the “V-shaped” rally so many investors seemed to be counting on. To that end, I thought Microchip Technology (MCHP) shares were ahead of themselves in the short term back in February, and the shares are now pretty much flat versus that last article.

With Microchip revising down for the fourth time, and blaming it largely on the tariff issue, I wonder if this will be the moment of reckoning for the larger chip space. Either way, I still see some downside risk over the near term. Specific to Microchip, I do like the business and management’s active approach to inventory management and M&A, even if I think they are occasionally too bullish on guidance. High debt is a risk (almost 8x my FY20 FCF estimate), and the shares don’t look like a margin bargain on short-term metrics, but I’d keep an eye on any sell-off, as I think the shares can go higher over the long term.

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Microchip Technology Bumps Along The Bottom

Lattice Semiconductor Posts A Good Quarter, But The Bigger Story Is Still Building

When I last wrote about Lattice (LSCC) I said “clearly the word is out” on this company’s turnaround/restructuring plan, but the shares are up another 25% since then as investors continue to wake up to the significant opportunities for Lattice’s low-power FPGAs in emerging applications like 5G and edge AI inference. With FPGA competitors like Xilinx (XLNX) and Intel (INTC) focusing on much different products and markets, and product performance challenges with would-be competitors from the MCU space, I like the set-up for Lattice over the next three to five years.

What I don’t like is the price. Even factoring in a significant revenue and margin ramp, it is difficult to call today’s price a bargain. While there is room for Lattice to exceed even bullish expectations, and investors love semiconductor growth stories (as seen with IoT-driven Silicon Labs (SLAB) ), I’m not inclined to chase the shares at this point.

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Lattice Semiconductor Posts A Good Quarter, But The Bigger Story Is Still Building

Dialog Semiconductor Gets Rewarded For Walking Away From Synaptics

Battered power management semiconductor company Dialog Semiconductor (OTCPK:DLGNF

) (DLGS.XE) has done a little better since my last update on the company, as the market has reacted positively to a favorable second quarter pre-announcement, and now, the announcement that it has terminated merger discussions with Synaptics (SYNA).

Overpaying for Synaptics wasn’t going to help Dialog, but Dialog does still need a lot of self-help. The company is looking at a steep downward turn in power management integrated circuit (or PMIC) revenue from Apple (AAPL), and the company is a long way from solid traction in markets outside mobile (and/or with customers other than Apple). Although the shares no longer trade at a discount to zero value in the mobile business, there could still be upside if Dialog can grow its rapid charging, connectivity, and auto/industrial businesses and/or find a new M&A dance partner.

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Dialog Semiconductor Gets Rewarded For Walking Away From Synaptics

Lattice Semiconductor Looking To Go From Stabilization To Growth

It has been a rocky couple of years for Lattice Semiconductor (LSCC), including a failed attempt to sell the company to a Chinese entity, but the company has regrouped and management has stabilized the business. Now the question moves to whether or not the company’s focus on lower-cost, lower-power FPGAs for applications like robotics, security/surveillance, auto ADAS, and edge computing/networking can drive a re-acceleration to double-digit revenue growth and meaningful margin leverage.

I’m skeptical on Lattice’s prospects for attaining/maintaining double-digit revenue growth on any consistent or long-term basis, but I do believe the company’s low-power FPGA and millimeter wave technologies address real market needs and opportunities, and I believe the move to 28nm FD-SOI chip architecture can drive meaningful margin leverage. With the shares trading between my DCF and margin-based EV/revenue fair values, I believe there’s still upside here, but Lattice will need to start delivering some beat-and-raise quarters to drive truly exciting performance.

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Lattice Semiconductor Looking To Go From Stabilization To Growth

Microsemi Finds Its Last Deal

Management at Microsemi (MSCC) is known for commenting that in semiconductor M&A, "You buy until you get bought." There have been rumors off and on about potential bidders circling Microsemi for a little while now, and the executive management's compensation plan was certainly structured to reward a deal. Now Microsemi finally found its buyer - Microchip Technology (MCHP), a seasoned semiconductor M&A veteran that should reap meaningful revenue and cost synergies from the deal.

Given the deal price, I don't think Microsemi investors have a compelling need to stay to the very end; a rival bid is always possible, but the price offered isn't such that I think another bid is highly likely. Pre-market indications are that Microsemi won't trade up to the full bid price just yet, though, so Microsemi investors can at least get paid a little for waiting unless and until they have a better idea.

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Microsemi Finds Its Last Deal

Lattice Semiconductor Looking To Reach That Next Level

Lattice Semiconductor (LSCC) has some meaningful operational challenges left to overcome, not the least of which are pushing out ASIC/microcontroller companies for design wins and leveraging an operating expense structure that is bloated relative to the revenue base. The company is not without opportunity, though, as Lattice's low-cost lower-power FPGAs are winning slots across communications, computing, industrial, and auto end-markets, with future opportunities in so-called "edge" applications like machine vision, artificial intelligence, and AR/VR.

I think investors are right to remain skeptical about Lattice's standalone potential, particularly given that double-digit revenue growth has often been a difficult bar for the company to reach and that it is difficult to drive attractive operating leverage with a relatively small revenue base. Even so, the standalone potential still suggests some undervaluation, and I continue to believe that Lattice could draw a bid of $7 (or more) from a company that wants its FPGA and mmWave technologies.

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Lattice Semiconductor Looking To Reach That Next Level

Lattice Semiconductor Has To Get Back To Business As Usual

After around a year of speculation and worry, Lattice Semiconductor (LSCC) finally got resolution on the $8.30/share Canyon Bridge takeout offer, as an executive order from President Trump blocked the deal on security grounds after a recommendation from the Committee on Foreign Investment in the United States. This decision wasn't exactly a surprise, as the company had multiple go-arounds with the Committee (including two re-filings), and the shares were down about a quarter year-to-date.

Lattice has a lot of work to do. Guidance and context have been lacking, as management elected not to host conference calls while the Canyon Bridge deal was pending, but revenue and gross margins have been choppy. On the other hand, the company's IP and capabilities in low-power programmable logic devices (including FPGA) and app-specific standard products have value, and the company's cost structure could offer meaningful (and attractive) synergies for the right acquirer.

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Lattice Semiconductor Has To Get Back To Business As Usual

Seeking Alpha: Is The Latest Stumble An Opportunity At Altera?

Altera (NASDAQ:ALTR) shares have gone nowhere fast. After a run that saw the shares double from May of 2010 to May of 2011, the shares have spent most of the following four years chopping around between $30 and $40. It hasn't really gone all that much better for Altera's chief rival, Xilinx (NASDAQ:XLNX), either - the shares haven't shown the same choppiness, but the five-year returns are almost identical.

I liked the shares around $34 back in June of 2014 and they did reach $38 before disappointing guidance and growing concerns about the health of the telecom/wireless business sent them back below the $35 midline. While I do think the shares are undervalued today, investors need to appreciate that the competitive dance with Xilinx is unlikely to ever result in a clear winner and that new entrants into the market could eventually chip away at market share and margins. I still like Altera relative to a lot of the analog players, but the stock likely needs the company to post strong margins in the second half of 2015 and no further pushouts of the 14nm plans to break out above the high $30's.

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Is The Latest Stumble An Opportunity At Altera?

Investopedia: A Summer Window Of Opportunity For Altera

With chip companies in the analog (like Analog Devices (NYSE:ADI), wireless (like Broadcom (Nasdaq:BRCM), and other spaces reporting relatively unspectacular near-term demand, it's no great surprise or disgrace that Altera (Nasdaq:ALTR) finds itself in the same boat. While the idea that the programmable logic device (PLD) market should be growing about twice as fast as the overall chip market has been flogged for years (probably nearly to the point of death), it's not sparing Altera from the sluggish conditions in the wireless capex, industrial/auto, or networking verticals. Even so, for a stock that has often seemed expensive to me, this could be an interesting window of opportunity.

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Seeking Alpha: The Chip Recovery Is Underway At Xilinx

There's a saying that goes, "Once is happenstance, twice is coincidence, the third time is enemy action". With a small collection of chip company earnings in hand, it does look like the long-await recovering in semiconductors is at hand. As is so often the case, though, the markets have anticipated the reality and Xilinx (XLNX) shares have been bid up to something less than a full bargain.

An Encouraging Third Quarter
Certainly a little context is important when looking at Xilinx's report. For starters, while it was an encouraging report, results were still at the lower end of original (before the late-quarter revision from management) guidance range. It's also important to remember that sales were down - down 8% sequentially and 10% from last year.

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The Chip Recovery Is Underway At Xilinx

Investopedia: Altera And Texas Instruments - One Last Cut Before The Rebound?

Hopes for a Christmas miracle in the chip sector took a hit Thursday night, as both Altera (Nasdaq:ALTR) and Texas Instruments (NYSE:TXN) revised their fourth quarter guidance lower, on widespread chip weakness. If there's a silver lining to this cloud, it may be in that both companies are seeing similar trends and both believe that the current state of industry shipments is unsustainable. Although more than a few investors have already burned their fingers looking for a turnaround, the next quarter could be the bottom of the cycle and may be pointing towards a sharper rebound in 2012.

Altera Doubles Down 

Altera had previously expected sequential revenue declines of 7 to 11% and analysts dutifully pegged their estimates at a 9% sequential decline. Now, though, in response to what management characterized as "widespread weakness," they are revising their expectations to a decline of 13 to 16%. Given that Altera's smaller competitor Lattice (Nasdaq:LSCC) also warned of worse-than-expected results, and guided for a similar 14 to 17% sequential decline, the idea of widespread weakness seems legitimate.

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Investopedia: Altera's Growth Story In A Pause

As wireless companies seem committed to never-ending capital spending and network upgrades, it would make sense that key suppliers to this market would be strong secular growth stories. Add a product/technology transition story to the mix and you have a pretty interesting growth story. That's the very short version of the buy thesis on chip company Altera (Nasdaq:ALTR) and while it's a compelling story, it is not without some risks and bumps in the road.

A Tough Third Quarter 

Both Altera and rival Xilinx (Nasdaq:XLNX) told us all that this would be a bad quarter, but results at Altera were actually a little worse than expected. Revenue fell almost 1% from last year and almost 5% from the prior quarter, as telecom spending, which typically makes up close to half of Altera's revenue, dropped sharply and revenue fell almost 13% sequentially. The company's industrial business was not good either, down about 7%, and though the networking/computing segment was strong, up over 30%, it's relatively small.

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Single Digits ... But Not Growth Midgets!

In theory, the price of a stock should be irrelevant to its prospects. In practice, though, there are always investors looking for low-priced stocks that could significantly boost the returns in their portfolio. Although we strongly urge investors to avoid the penny stock casino, there are some single-digit stocks that could be worth a further look. 

Atmel (Nasdaq:ATML)
Investors had to wait quite a while for this long-struggling chip stock to get moving, but it has done quite well so far this year. While expectations may have gotten ahead of reality in the short term and there could be some inventory risks in the company's industrial and automotive business segments, there is a lot to like about this company. Not only does the company have a good microcontroller business, but the company's maXTouch product for touchscreens has done well with customers like HTC, Samsung and Motorola (NYSE:MOT). Touchscreens are here to stay, and that could vault Atmel back into the ranks of a growth semiconductor company.

 
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Actel - A Logical Deal For Microsemi

Microsemi (Nasdaq: MSCC) has definitely been on an acquisition binge here of late, and now the company is adding Actel (Nasdaq: ACTL) to the stable. Microsemi announced this morning that it was buying Actel in an all-cash deal; offering $20.88 a share. That is not too bad of a premium to pay for MSCC shareholders like me, and the $430 million net cash price will be covered in part by term loan facility and revolver from Morgan Stanley.

Actel specializes in low-power FPGAs and there should be some definite synergies with Microsemi's existing business. In particular, Actel's radiation-tolerant chips should fit in nicely with Microsemi's communications, space, and satellite businesses. Moreover, because Actel is relatively specialized and focused, I do not think Microsemi needs to worry about now competing with Altera (Nasdaq: ALTR) or Xilinx (Nasdaq: XLNX) - two much larger competitors in the overall FPGA segment of the semiconductor market.

Actel was, and is, a largely unknown semiconductor company. It is a small company (note the $430M net price) with effectively no analyst coverage. Nevertheless, the company has been reporting some better quarters of late and seems to have some momentum in the business ... but results have been a little erratic historically. Sales have grown pretty consistently over the past decade, but operating margins have been all over the place (not unusual for semiconductor companies, especially the smaller ones).

All in all, it looks like a good (and logical) deal for Microsemi. I'm a little surprised when companies start showing bursts of acquisition activity, but so far MSCC's deals have made sense and this Actel acquisition should be pretty accretive for the company, and relatively soon at that. Over the longer term, this should deepen (and broaden) MSCC's existing business relationships and may open the door to some new product/market opportunities for the company.

I suppose Actel shareholders might be annoyed at the relatively modest premium for their shares, but that is what happens when a company flies below the radar. If nothing else, maybe Actel shareholders should think about taking the cash from Microsemi and reinvesting it in Microsemi shares - the company is doing well, the business is an intriguing combination of "niche" and "growth", and the stock should still have some room to run.

Oh, by the way ... Lattice Semiconductor (Nasdaq: LSCC) is eerily similar to Actel in a lot of respects (an FPGA company, similar market cap, etc.). I'm not predicting a buyout here, but for anybody looking for "the next Actel", the similarities are there...

Disclosure - I own shares of Microsemi.