Focusing On AI And Launching Nexus 2 And Avant Will Strengthen Future Market Position

Key Takeaways

• New leadership and R&D expansion in India are anticipated to improve efficiencies and foster innovation, potentially boosting margins and revenue growth.
  
• Focus on AI, edge computing, and product rollouts aims to leverage demand trends and enhance revenue through innovative FPGA applications.
  
• Declining revenue, supply chain inefficiencies, workforce reductions, and macroeconomic challenges could undermine Lattice Semiconductor's growth and financial stability amidst a sluggish industry outlook.

Catalysts

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

• The appointment of new executive team members with extensive industry experience is expected to enhance operational effectiveness and strategic decision-making, potentially positively impacting margins through improved efficiencies.
  
• The inauguration of a new state-of-the-art R&D site in Pune, India, aims to leverage local talent to bolster innovation. This could drive revenue growth by expediting the development of innovative, cost-effective solutions.
  
• Lattice's strategic focus on high-growth secular trends such as AI, edge computing, and post-quantum cryptography is positioned to drive future revenue growth as demand for FPGAs in these applications increases.
  
• The increasing backlog and book-to-bill ratio above one suggest improving demand conditions and stronger sales pipeline, enhancing the revenue outlook and thus potentially increasing earnings.
  
• The accelerated rollout of new products such as Nexus 2 and Avant, which showed double-digit growth, coupled with the enhancement of their product offerings, is projected to significantly contribute to revenue growth in the coming years.

Lattice Semiconductor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lattice Semiconductor's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.0% today to 28.2% in 3 years time.
• Analysts expect earnings to reach $200.9 million (and earnings per share of $1.49) by about March 2028, up from $61.1 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 60.4x on those 2028 earnings, down from 140.5x today. This future PE is greater than the current PE for the US Semiconductor industry at 29.4x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.48%, as per the Simply Wall St company report.

Lattice Semiconductor Future Earnings Per Share Growth

Risks

• Management noted that revenue for the full year 2024 was $509.4 million, down 31% from 2023, indicating a significant decline in revenue, which could affect future financial stability and growth projections.
  
• The company highlighted ongoing inventory normalization and macroeconomic softness, impacting sequential and year-over-year revenue declines, indicating vulnerable market conditions affecting revenue growth.
  
• There was a $7 million one-time charge related to materials no longer expected to be used, impacting gross margin and indicating potential inefficiencies in supply chain management that could affect earnings.
  
• A workforce reduction of 14% was implemented, which, while meant to align resources and drive double-digit earnings expansion, could lead to operational challenges and affect net margins if not managed properly.
  
• The semiconductor industry generally anticipates low single-digit revenue growth in 2025, which might lag behind higher historical growth expectations and could limit future earnings potential if market conditions do not improve.

Valuation

• The analysts have a consensus price target of $68.871 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 $58.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $712.7 million, earnings will come to $200.9 million, and it would be trading on a PE ratio of 60.4x, assuming you use a discount rate of 8.5%.
• Given the current share price of $62.31, the analyst price target of $68.87 is 9.5% higher.
• 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.