Edge AI And Low-Power FPGAs Will Drive Future Market Leadership

Key Takeaways

• Product differentiation in low-power FPGAs and Edge AI advancements position Lattice well for future revenue growth and market leadership.
  
• Operational restructuring and share buybacks are set to optimize expenses and boost earnings and EPS growth.
  
• Workforce reduction and demand challenges in key segments suggest cost management efforts amid slower revenue growth, posing pressure on gross margins and long-term recovery.

Catalysts

Develops and sells semiconductor products in Asia, Europe, and the Americas.

• Lattice's focus on product differentiation, particularly in low-power programmable small to mid-range FPGAs, is expected to drive customer benefits and market leadership, which will support long-term revenue growth.
  
• The company is experiencing increasing design momentum and a stronger backlog, indicating potential future demand and revenue growth as industry headwinds subside.
  
• Lattice's advancements in Edge AI, with strong traction in server, laptop, industrial, and automotive applications, are expected to support revenue growth as AI markets expand.
  
• Operational restructuring, including a 14% headcount reduction, aims to optimize operational expenses and is anticipated to enhance net margins and earnings expansion in 2025.
  
• Continued share buybacks demonstrate a commitment to returning value to shareholders, potentially contributing to EPS growth moving forward.

Lattice Semiconductor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lattice Semiconductor's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.5% today to 23.9% in 3 years time.
• Analysts expect earnings to reach $162.2 million (and earnings per share of $1.24) by about December 2027, up from $143.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 62.3x on those 2027 earnings, up from 60.4x today. This future PE is greater than the current PE for the US Semiconductor industry at 31.9x.
• Analysts expect the number of shares outstanding to decline by 1.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.91%, as per the Simply Wall St company report.

Lattice Semiconductor Future Earnings Per Share Growth

Risks

• The company reported a workforce reduction of 14%, which could indicate attempts to manage costs in response to slower-than-expected revenue growth, potentially impacting net margins and earnings.
  
• Industrial and Automotive segments, which comprise over 90% of total revenue, have seen reductions due to broader market demand issues and inventory normalization, likely affecting revenue growth.
  
• The company expects a more gradual U-shaped recovery rather than a rapid V-shaped one, with only low single-digit revenue growth anticipated for 2025, indicating slower top-line growth.
  
• High levels of inventory at the distributor level suggest challenges in channel management and potential revenue recognition shifts, which could pressure gross margins if not managed effectively.
  
• A 34% year-over-year revenue decline partly due to continued inventory normalization reflects significant headwinds in demand, impacting overall revenue and earnings potential.

Valuation

• The analysts have a consensus price target of $61.42 for Lattice Semiconductor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $678.4 million, earnings will come to $162.2 million, and it would be trading on a PE ratio of 62.3x, assuming you use a discount rate of 7.9%.
• Given the current share price of $62.77, the analyst's price target of $61.42 is 2.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.