Summary
- LSCC continues to grow revenue and earnings at a record pace with the company seeing little of the weakness other semis are experiencing.
- LSCC itself is doing fine, but there are a number of factors out there that seem to be weighing on the stock.
- The stock has struggled all year despite record earnings and the charts suggest the stock is likely heading to new lows for several reasons.
- LSCC seems to have a bright future long term, but in the short term, headwinds are likely to push the stock lower.
Lattice Semiconductor ( LSCC ) continues to execute. LSCC, for instance, set new record highs in a number of areas in its most recent report. However, the same cannot be said of the stock. LSCC itself has done well, but the stock has not. The stock has struggled all year, temporary bounces notwithstanding. Furthermore, it appears the stock may be getting ready for new lows. Why will be covered next.
Why new lows may be in the pipeline for LSCC
The stock has lost 29% YTD. Furthermore, the chart below shows how the stock seems to have topped out in the first half of August after rallying in July. The stock made several attempts to break through, but it appears to have run into resistance at $65 or so, which also to be the same region where previous rallies came to a halt earlier in the year.
The stock started to decline after failing to break through resistance, but one could argue the stock was due for a correction after the big move up in July, especially with the stock coming close to appreciating by about 50%. A case could be made to stay bullish as the stock was still in position to take another crack at breaking through resistance.
However, this has become harder to do in recent days. Not only has the stock continued to decline, but it has, for instance, fallen below the closely watched 50-day moving average, a bearish signal. The stock may be looking to retrace the move up in July in search of support. This could be in the $50 region where the stock was able to find some support in the past, but it may have to go even lower.
Note the two trendlines in the chart above. The upper trendline connects the highs and the lower trendline connect the lows. The former represents resistance and the latter represents support. If the stock is looking for a good foundation from which to rally, then it may have to head to the lower trendline for solid support.
However, the upper trendline connecting the highs is horizontal, meaning that the highs have topped out at around the same price level. In contrast, the lower trendline is angled downwards, which means the stock is likely to hit new lows before it finds support at the lower trendline. It could go even lower if support does not hold.
Why some may still want to take an interest in LSCC
The stock does not show it, but LSCC itself is doing fine. LSCC is actually breaking records left and right. Revenue, gross margins and profitability reached record highs in the most recent quarterly report. Q2 revenue increased by 28.2% YoY to $161.4M, a record high. Non-GAAP gross margin of 69.1% and non-GAAP operating margin of 38.1% are both record highs.
GAAP EPS increased by 113.3% YoY to $0.32 and non-GAAP EPS increased by 68% YoY to $0.42. The difference between the two can be attributed to stock-based compensation expense of $13.7M, which is included in the former, but not in the latter. Note that earnings got a boost from stock buybacks with LSCC spending $35M to buy back 735,000 shares in Q2. This is set to continue with LSCC adding $150M to its buyback program . The cash balance totaled $118M at the end of Q2, down from $132M at the start of FY2022. The table below shows the numbers for Q2 FY2022.
(GAAP) | Q2 FY2022 | Q1 FY2022 | Q2 FY2021 | QoQ | YoY |
Revenue | $161.372M | $150.515M | $125.905M | 7.2% | 28.2% |
Gross margin | 68.5% | 66.9% | 61.3% | 160bps | 720bps |
Operating expenses | $63.699M | $63.004M | $53.868M | 1.1% | 18.3% |
Operating income | $46.786M | $37.763M | $23.316M | 23.9% | 100.7% |
Net income | $44.532M | $36.078M | $21.838M | 23.4% | 103.9% |
EPS | $0.32 | $0.26 | $0.15 | 23.1% | 113.3% |
(Non-GAAP) | |||||
Revenue | $161.372M | $150.515M | $125.905M | 7.2% | 28.2% |
Gross margin | 69.1% | 67.7% | 62.1% | 140bps | 700bps |
Operating expenses | $49.943M | $47.243M | $41.528M | 5.7% | 20.3% |
Operating income | $61.553M | $54.645M | $36.651M | 12.6% | 67.9% |
Net income | $59.124M | $52.696M | $35.206M | 12.2% | 67.9% |
EPS | $0.42 | $0.37 | $0.25 | 13.5% | 68.0% |
Source: LSCC Form 8-K
Guidance calls for revenue of $161-171M, an increase of 25.9% YoY at the midpoint, gross margin of 68-70% and operating expenses of $50-52M, both in terms of non-GAAP, in Q3 FY2022. In comparison, revenue was $131.9M, gross margin was 63.6% and operating expenses were $43.8M in Q3 FY2021. From the Q2 earnings call:
"Let me now review our outlook for the third quarter. Revenue for the third quarter of 2022 is expected to be between $161 million and $171 million. Gross margin is expected to be 69%, plus or minus 1% on a non-GAAP basis. Total operating expenses for the third quarter are expected to be between $50 million and $52 million on a non-GAAP basis."
A transcript of the Q2 FY2022 earnings call can be found here .
What could be pushing the stock lower
Clearly, it's not earnings growth that is driving down the stock. LSCC is doing fine on that front. There are, however, other factors at work that seem to be weighing on the stock. Valuations, for starters, are on the high side, which could be a problem in today's environment where interest rates are going up and there is less of a willingness to pay a high premium for growth, unlike fairly recently when the Fed's monetary policy was more loose.
For instance, LSCC has an enterprise value of $7.6B, which is equal to 53 times EBIT on a trailing basis and 31 times EBIT on a forward basis. In comparison, other sector names are available at lower valuations with the sector median at 19x and 16x respectively. Some may even consider LSCC to be overvalued with the stock valued at 17 times book value. The median is more like 3x. The table below shows the multiples LSCC trades at.
LSCC | |
Market cap | $7.54B |
Enterprise value | $7.60B |
Revenue ("ttm") | $585.6M |
EBIT | $143.8M |
Trailing P/E | 57.89 |
Forward P/E | 44.01 |
PEG ratio | 0.61 |
P/S | 12.86 |
P/B | 17.29 |
EV/sales | 12.98 |
Trailing EV/EBIT | 52.83 |
Forward EV/EBIT | 31.07 |
Source: Seeking Alpha
There are other more pressing issues out there. Reports of falling demand in certain sectors of the semiconductor market has affected sentiment towards the semiconductor sector, including LSCC as a supplier of FPGAs. A growing number of semiconductor names have lowered their outlook due to weakening demand. This includes AMD ( AMD ), which has taken over Xilinx, the leading supplier of FPGAs.
LSCC itself is doing fine as shown by its latest quarterly results and guidance, but it did acknowledge signs of weakness in some market segments, specifically the consumer segment. Revenue from the consumer declined, but LSCC was able to make up for it with growth in the communications & computing and industrial & automotive segments.
This is in line with what a number of other companies have reported. The semiconductor weakness seems to be mostly confined to certain end users at this point, primarily PCs and smartphones. Still, there is growing concern the weakness could spread elsewhere. Already, some companies like Micron ( MU ) have reported that weakness is spreading to other segments like datacenters and automotive.
There is one other risk factor out there. LSCC faces the possibility of the U.S. government imposing additional trade restrictions against China, which could become a problem with China accounting for 55% of FY2021 revenue, according to the most recent Form 10-K . While LSCC has not been impacted, others have. There is always the possibility LSCC could have access to its biggest market curtailed.
Investor takeaways
LSCC is facing a contradiction. On the one hand, consumer weakness aside, sales and earnings growth are still going strong at LSCC. Both the top and the bottom line are better than ever. Guidance is strong. Prospects for future growth are there. There are, for instance, new products like Avant coming out, which opens up a market not previously served by LSCC.
On the other hand, there is growing concern more semis are about to experience something similar to what is happening to companies like MU. That is a weakening in demand that started out in some segments, which then spreads to other segments. LSCC is only seeing weakness in the consumer segment and other segments have more than made up for it, but the question is whether that will hold or whether other segments will start to decline. The fact that the stock has struggled all year suggests the market is leaning towards the latter.
I am neutral on LSCC. There are a number of arguments to be made in favor of long LSCC. Demand remains strong for the most part. LSCC has added much value to its products like a software layer on top of its power-efficient FPGAs, which adds flexibility, giving the customer an incentive to stick with LSCC as the solution.
However, there are also arguments to be made against long LSCC. LSCC is priced on the high side and some would argue excessively so, particularly with multiples where they are. High valuations were not much of a problem in past years, but macro changes have changed the name of the game. LSCC is increasingly competing against other stocks that are often cheaper with similar levels of growth. The stock is thus in danger of being dropped in favor of other names offering better value.
While growth remains strong, there are mounting concerns it is under threat. There are no guarantees that, for instance, the automotive market will remain as robust as it is right now. The reality is that there is a confluence of headwinds out there that looks destined to hurt semiconductor demand. This includes high inflation, a weakening global economy, geopolitical tensions and trade restrictions, particularly between the U.S. and China.
The charts are sending bearish signals. The stock has recently failed to overcome resistance once again. The stock is falling and support is needed to stem the slide, but the stock may have to set new lows before it finds support. The stock has just fallen below the 50-day moving average, which is likely to encourage the bears and discourage the bulls.
Bottom line, LSCC may have a bright future long term, but short term, the stock is likely heading lower. If the record-setting pace of growth has been unable to keep the stock from falling, then it's worth asking what will happen if or when LSCC encounters additional weakness on top of the consumer segment. LSCC soared higher in the wake of COVID-19, coming close to quadrupling in value, resulting in valuations that may be too high in today's stock market where high valuations are harder to justify. The stock looks like it wants to move lower. Odds are it will go lower.
For further details see:
Lattice Semiconductor: New Lows Are Possible