Calculated Partnerships And New Tech Boost Future Revenue

Key Takeaways

• Focus on new product launches and value portfolio expansion in FPGA segments aims to boost growth opportunities and deepen customer relationships.
  
• Emphasis on security solutions and strategic partnerships, like with NVIDIA for AI, is designed to address technology trends and expand market share.
  
• Leadership changes and ongoing revenue decline underscore fundamental challenges, with recovery hinged on market conditions and product execution amidst global supply constraints.

Catalysts

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

• Lattice Semiconductor's ongoing investment in new product launches, such as the Certus-NX family and the Lattice MachXO5D-NX, aims to create new growth opportunities and deepen customer relationships, impacting future revenue positively.
  
• The company's focus on accelerating its value portfolio in small and mid-range FPGA segments is designed to expand its Total Addressable Market (TAM), driving additional long-term revenue acceleration.
  
• Lattice's emphasis on security-focused hardware and software solutions, including the latest version of the Lattice Sentry solution stack, targets the growing demand for secure computing, which can lead to higher revenue from sectors prioritizing cybersecurity.
  
• Strategic partnerships, such as the collaboration with NVIDIA for Edge AI solutions, demonstrate Lattice's commitment to addressing emerging technology trends, potentially increasing its market share and revenues in AI-related applications.
  
• The continuation of share buybacks, as part of Lattice's capital allocation strategy, aims to support earnings per share (EPS) growth, positively influencing shareholder value as the company navigates through inventory normalization and prepares for future demand recovery.

Assumptions

• Analysts are assuming Lattice Semiconductor's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.3% today to 24.2% in 3 years time.
• Analysts expect earnings to reach $189.3 million (and earnings per share of $1.41) by about September 2027, down from $189.9 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 54.9x on those 2027 earnings, up from 30.2x today. This future PE is greater than the current PE for the US Semiconductor industry at 25.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

Risks

• The ongoing CEO search and leadership transition could introduce uncertainty and impact strategic consistency, potentially affecting investor confidence and corporate direction.
  
• Continued revenue decline of 12% sequentially and 35% year-over-year signals underlying demand challenges, potentially impacting future earnings and revenue growth.
  
• The dependence on market recovery and the expectation that the inventory normalization cycle will persist through the second half of the year may delay financial performance recovery, impacting short to medium-term revenue.
  
• Specific dependence on new product ramps (e.g., Certus-NX family, Avant devices) for future growth carries execution risk, especially in a fluctuating market environment, potentially affecting expected revenue acceleration.
  
• Global supply chain issues, operational adjustments, and under-shipment to match customer demand for inventory normalization may further strain revenue and margins in the near term.

Valuation

• The analysts have a consensus price target of $60.4 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 $47.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $782.2 million, earnings will come to $189.3 million, and it would be trading on a PE ratio of 54.9x, assuming you use a discount rate of 7.9%.
• Given the current share price of $41.64, the analyst's price target of $60.4 is 31.1% 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.