Lattice Stock: Buy For The Long-Term Despite Short-Term Headwinds (NASDAQ:LSCC)

In our earlier evaluation of Lattice Semiconductor Company (NASDAQ:LSCC), we delved into the outstanding upsurge of the corporate’s development in 2022, which surged at a formidable 28.1%, fuelled by sturdy performances within the Communications & Computing (26.1%) and Industrial & Automotive (41.2%) segments, the place Lattice expanded its product portfolio and elevated its competitiveness. We believed these elements enabled the corporate to edge out different rivals. Moreover, our evaluation indicated its development was supported by the rising use of low-power FPGAs in EVs.

On this newest evaluation, we centered on Lattice’s newest FPGA developments that might drive development past 2024. Firstly, we analyzed the growth of Lattice’s FPGA portfolio, increasing its low-power portfolio with Nexus and introducing mid-range FPGA options with the launch of Avant-G and Avant-X. We carried out a comparative evaluation of their options towards rivals’ choices to gauge their aggressive edge. Moreover, we examined the potential for Lattice to capitalize on AI-driven functions using its mid-range FPGAs. Lastly, we delved into the outlook for FPGA adoption throughout numerous finish markets, updating our income projections for Lattice.

Growth of FPGA Product Portfolio

Firstly, we examined Lattice’s FPGA portfolio and in contrast it with prime rivals (excluding Renesas) within the desk for Low to Mid-Vary FPGAs, with low-range FPGAs of fewer than 100,000 logic cells and mid-range spanning 100,000 to 500,000 logic cells in keeping with Lattice.

Comparability of Low to Mid-Vary FPGAs

Lattice

AMD

Microchip

Intel

Variety of Low-Vary FPGAs (<100K Logic)

3,454

2,790

1,150

2,981

Variety of Mid-Vary FPGAs (100K – 500K Logic)

199

854

301

3,573

Complete Low to Mid-range FPGAs

3,653

3,644

1,451

6,554

Click on to enlarge

Supply: DigiKey, Khaveen Investments

Primarily based on the desk, Lattice has the best variety of Low-Vary FPGAs (<100K Logic parts), highlighting its benefit on this section. In our earlier evaluation, we highlighted the corporate’s deal with “small dimension and power-efficient FPGA as a distinction to its rivals within the FPGA market together with Xilinx and Intel.”

Lattice Nexus Platform

Inside the low-range FPGA portfolio, Lattice not too long ago expanded its portfolio with its CrossLinkU-NX FPGA household, claiming to be the trade’s first low-power FPGAs that includes built-in USB, to speed up USB-equipped system designs and embedded imaginative and prescient functions. As well as, the corporate highlighted in its earnings briefing Nexus as a “main contributor” to Lattice’s development and the introduction of latest FPGAs throughout the Nexus household.

A few examples of that’s on Nexus, we have launched seven system households based mostly on Nexus. 5 of these system households are already in manufacturing. However there’s two extra that go into manufacturing this 12 months.” – James Anderson, CEO

Avant FPGAs

We recognized that Lattice at the moment has solely 199 mid-range FPGAs, which is considerably decrease than rivals AMD, Microchip (MCHP), and Intel (INTC). Amongst these corporations, Intel leads the way in which with a complete of three,573 mid-range FPGAs. Nonetheless, from its earnings briefing, administration introduced its growth within the mid-power FPGAs with the launch of Avant-G and Avant-X not too long ago, following Avant-E. Moreover, Lattice expects the Avant portfolio to develop to between 15% to twenty% of its complete income in 3 to 4 years. From its Investor Presentation, administration claimed Avant supplies 2.5x decrease energy consumption and 2x quicker efficiency than rivals.

Therefore, we in contrast Lattice’s newest mid-range FPGA merchandise, Avant-G and Avant-X, with comparable mid-range FPGAs from rivals to find out their efficiency competitiveness based mostly on their reminiscence charges, reminiscence kind, transceivers information charges, and course of node.

Comparability of Mid-Vary FPGA

Avant-G (Lattice)

Avant-X (Lattice)

Spartan UltraScale+ (AMD)

PolarFire (Microchip)

Agilex 5 D-series (Intel)

Agilex 5 E-series (Intel)

Reminiscence Charges (RAM)

2.4 Gbps

2.1-2.4 Gbps

2.4-4.3 Gbps

1.6 Gbps

3.2-4.3Gbps

2.4-3.7Gbps

Reminiscence Kind (RAM)

LPDDR4/DDR4

DDR5/LPDDR 4/DDR4

LPDDR5/DDR4/LPDDR4

DDR4/DDR3/LPDDR3

DDR5/ LPDDR5/DDR4/LPDDR4

DDR5/ LPDDR5/DDR4/LPDDR4

Transceivers Information Charges

10Gbps

25Gbps

16.3 Gbps

12.7 Gbps

28 Gbps

28Gbps

Course of

16nm

16nm

16nm

28nm

10nm

10nm

Click on to enlarge

Supply: Firm Information, Khaveen Investments

Primarily based on the desk, the 2 Avant FPGAs have a slower reminiscence velocity (as much as 2.4 Gbps) in comparison with AMD (2.4 – 4.3 Gbps) and Intel (as much as 4.3 Gbps), quicker reminiscence permits for faster information entry and thus lowered latency. As well as, the reminiscence kind may have an effect on the facility consumption and bandwidth of the FPGAs, and essentially the most superior varieties available in the market are DDR5 and LPDDR5. Therefore, Intel’s Agilex 5 sequence leads on this facet, adopted by AMD and Lattice. In relation to transceivers’ information charges, Intel’s Agilex 5 sequence is the perfect with 28 Gbps. Excessive transceiver charges permit for quicker information change and bandwidth-intensive functions. Lattice’s Avant-X has a barely decrease fee of 25 Gbps, however the firm claims it additionally gives “energy effectivity, superior connectivity, and optimized compute”. Different FPGAs’ information charges are considerably decrease at a variety from 10 Gbps to 16.3 Gbps. Lastly, when it comes to course of node know-how used, Intel’s FPGAs are extra superior (10nm). Extra superior course of know-how can provide elevated logic density, decreased energy utilization and enhanced efficiency. However, Microchip falls behind compared to Lattice, AMD and Intel. We then ranked every of the elements and calculated the common rating of all elements.

Comparability of Mid-Vary FPGA

Avant-G (Lattice)

Avant-X (Lattice)

Spartan UltraScale+ (AMD)

PolarFire (Microchip)

Agilex 5 D-series (Intel)

Agilex 5 E-series (Intel)

Reminiscence Charges (RAM)

5

4

2

6

1

3

Reminiscence Kind (RAM)

5

3

4

6

1

1

Transceivers Information Charges

6

3

4

5

1

1

Course of

3

3

3

6

1

1

Common

4.75

3.25

3.25

5.75

1

1.5

Click on to enlarge

Supply: Khaveen Investments

In accordance with the desk above, Intel’s Agilex 5 D-series has the best rating in all facets, main it to be ranked in first place, adopted by Intel’s, Agilex 5 E-series. Avant-X and Spartan Ultrascale+ even have the identical rank, however Avant X has the next reminiscence velocity whereas Spartan has higher reminiscence kind and better transceivers information charges. Avant-G ranks fourth and Microchip’s PolarFire ranks final. Subsequently, we consider that despite the fact that Intel’s FPGAs edge out different rivals, Lattice’s FPGAs nonetheless have some aggressive benefits in comparison with Microchip, contemplating the corporate has simply expanded its portfolio to mid-range FPGAs. Total, we decided our efficiency comparability outcomes contradict the administration’s declare from its presentation, and we as a substitute consider Intel continues to be the superior firm within the mid-range section.

Outlook

Total, we examined the low to mid-range FPGAs of Lattice and its rivals. The corporate dominates with the biggest product breadth in low-range FPGA with nearly 3,500 merchandise. Moreover, the corporate launched a number of new merchandise on this vary which additional solidifies its product breadth. Nonetheless, the corporate has not stood out as a mid-range FPGA producer as a consequence of its low variety of mid-range FPGAs as a brand new entrant competing towards bigger gamers like AMD, Intel and Microchip on this section. In our earlier evaluation of Lattice, we additionally highlighted that AMD and Intel stay the highest FPGA producers with 53% and 26.7% market share in 2022. Lattice’s newest mid-range FPGA, Avant-G and Avant-X, lack competitiveness because it lags behind Intel’s and AMD’s mid-range FPGAs. Nonetheless, we consider the corporate’s launch of Avant establishes its entry into the mid-range FPGA market and the roadmap beneath reveals the deliberate improvement of future Avant FPGAs which may result in the corporate enhancing a few of its product specs missing equivalent to reminiscence charges, reminiscence kind, transceiver information charges and course of based mostly on our FPGA spec comparability evaluation above.

AI Impression to FPGA Demand

Subsequent, we examined how AI advantages Lattice’s FPGAs. Moreover, as administration highlighted from its earnings briefing that AI-related income was round $100 mln in 2023, accounting for about 14% of Lattice’s complete income, we additionally appeared into what segments the corporate derives its AI-related income. In accordance with the corporate’s CEO from its earnings briefing, Lattice estimated AI-related income from a variety of AI-related functions together with:

“AI-optimized servers within the information heart…Lattice gadgets are used within the management, administration, and safety of the AI computing system” “AI-enabled PCs, the place Lattice options are used to run the AI inference algorithm that gives options equivalent to person presence and gaze detection in PC programs just like the Lenovo ThinkPad” “AI-enabled automotive ADAS programs, the place Lattice options are used to combination and pre-process important information that’s used for AI processing”.

In accordance with Informa Tech, FPGAs can function {hardware} accelerators in information facilities, and they’re particularly useful for AI inferencing duties as they’ve increased throughput and decrease latency in comparison with common processors or GPUs. As well as, Lattice highlighted that its FPGAs have a 2.5x decrease energy consumption than different FPGAs. In our earlier evaluation of Nvidia (NVDA), we derived a forecasted common development fee for information heart chip development of 39%, pushed by demand from cloud service suppliers ramping up infrastructure. Moreover, the corporate not too long ago introduced a partnership with Nvidia to make the most of its power-efficient FPGAs to facilitate sensor fusion and bridging in Nvidia’s Jetson Orin and IGX Orin platforms, which fall underneath Nvidia’s Information Middle section. In accordance with Nvidia, Jetson Orin is designed to speed up energy-efficient autonomous programs, equivalent to robotics, imaginative and prescient AI, and edge functions, whereas the IGX Orin is right for AI-powered industrial and medical functions.

Apart from that, Lattice has additionally developed SensAI, a software program stack that makes use of its FPGAs for inferencing, permitting clients to “develop and deploy FPGA-based Machine Studying / Synthetic Intelligence options”. In PCs, Lattice’s SensAI can assist prolong battery life by 28% or detect person presence and a spotlight utilizing its Face Framing Expertise. Furthermore, Lattice claimed that its software program may also improve safety and optimize programs in PCs. In accordance with Counterpoint Analysis, the worldwide AI PCs market is anticipated to develop at a CAGR of fifty% reflecting the sturdy demand for AI PCs’ superior safety and elevated effectivity.

Lattice additionally has mVision that helps deploy options equivalent to “machine imaginative and prescient, robotics, ADAS, video surveillance, and drones”. Moreover, Lattice has highlighted that its FPGAs are additionally utilized in automotive ADAS and Infotainment programs by enabling parallel sensor processing, low-power interfaces and “hardware-based safety” capabilities. For instance, Lattice’s FPGAs are additionally used to assist ADAS “facet radar functions” for Mazda’s (OTCPK:MZDAY) CX-60 and CX-90 SUV. We highlighted a powerful demand for ADAS functions with a market CAGR of 18.7%.

Outlook

Finish Market

Forecast CAGR

Information Middle

39%

AI-enabled PC

50%

ADAS

18.7%

Common

35.9%

Click on to enlarge

Supply: Counterpoint Analysis, Acumen Analysis, Khaveen Investments

The desk above consists of the market CAGR of AI functions together with information facilities, AI-enabled PCs, and the ADAS market. Total, we calculated the common CAGR to be 35.9%. As well as, the corporate administration additionally expects increased AI-related income within the subsequent few years as highlighted by the quote beneath.

We anticipate our AI-related income to greater than double over the following few years based mostly on the rising pipeline of AI-related design wins. – James Anderson, CEO.

Therefore, from the administration steering of Lattice’s AI-related income to be $200 mln, we assumed the corporate to attain this within the subsequent three years and accordingly calculated the CAGR to be 26%. In contrast with our derived common market CAGR of 35.9%, it surpasses administration’s forecast and subsequently we consider administration’s steering of $200 mln in AI-related income could possibly be cheap.

Finish Markets Progress Outlook for FPGAs

Lastly, we examined the tip market outlook for FPGAs and subsequently forecasted the corporate’s income. Lattice’s Avant and Nexus are low and mid-range FPGAs, that concentrate on functions in Communications, Computing, Industrial & Automotive.

Communications and Computing

In accordance with Lattice, the corporate supplies options for “computing programs equivalent to servers and consumer gadgets, 5G wi-fi infrastructure, switches, routers, and different associated functions” on this section. For Computing, FPGAs can speed up information facilities and their computing capabilities by liberating up processor assets and decreasing energy consumption. In accordance with Intel, FPGAs can carry out higher than GPUs when “the appliance calls for low latency and low batch sizes”. In our earlier evaluation of Microsoft (MSFT), we estimated that the cloud market can be rising by a ahead common of 23% pushed by information quantity development. We consider information heart demand to be a superb gauge of FPGA demand in Computing, as FPGAs are utilized in information heart servers to dump “compute-intensive duties from the CPU and GPU” as a consequence of their low latency and power effectivity. For Communications, given their low latency and the power for parallel processing, FPGAs are appropriate for processing huge information circulate required within the 5G RAN. We highlighted in our earlier evaluation of Qualcomm that the penetration fee of 5G gadgets is projected to “attain 83% by 2027 from 62% in 2023”, boding effectively for the demand for 5G companies.

Industrial and Automotive

For this section, the corporate gives options to “industrial Web of Issues (“IoT”) and “Trade 4.0”, machine imaginative and prescient, robotics, manufacturing unit automation, superior driver help programs (“ADAS”), and automotive infotainment.”

For Industrial, from our earlier evaluation of ADI (ADI), we highlighted sturdy development within the semicon industrial market with a CAGR of seven.21%, pushed by sensible grid deployments and digitalization of factories. Intel’s case examine explains how FPGAs may allow the transformation of sensible factories with their parallel computing capabilities. Furthermore, Lattice’s Automate 3.0 answer stack can be used to speed up sensible automation system improvement, together with “robotics, embedded real-time networking, predictive upkeep, useful security (FuSa) and safety”.

For Automotive, the ADAS market is anticipated to develop at a CAGR of 18.7%. Furthermore, McKinsey expects the automotive software program market to develop at a CAGR of 9.4%, pushed by Software program-defined Autos as customers demand safer and extra superior vehicles. FPGAs may assist automotive producers enhance numerous options and allow SDVs, equivalent to zonal architectures, energy effectivity, real-time networking, and infotainment interfaces. Lattice claimed that its FPGA gives 2x quicker connectivity velocity and 5x extra unbiased sensor interfaces. The chart beneath summarizes how Lattice’s software program is utilized in numerous automotive functions.

Shopper

Within the Shopper section, the corporate’s merchandise are utilized in functions together with “sensible dwelling gadgets, prosumer gadgets, sound bars, high-end projectors, Augmented Actuality (“AR”) / Digital Actuality (“VR”), and wearables”, FPGAs can speed up processing energy, allow real-time sensor fusion and object recognition for AR functions, and optimize energy consumption. We highlighted that the AR/VR market CAGR is 42.24% in our earlier evaluation of Apple (AAPL), pushed by demand in shopper and enterprise functions.

Outlook

Phase Income ($’000s)

Our Earlier Forecast (2023)

Precise Income (2023)

Distinction

Communication and Computing

326,092

257,536

-68,556

Progress % (YoY)

18.7%

-6.3%

-25.0%

Industrial and Automotive

397,793

433,482

35,689

Progress % (YoY)

24.5%

35.7%

11.2%

Shopper

49,064

46,136

-2,928

Progress % (YoY)

0.0%

-6.0%

-6.0%

Licensing and Providers

15,730

-15,730

Progress % (YoY)

-8.2%

8.2%

Complete Income

788,678

737,154

-51,524

Progress % (YoY)

19.4%

11.6%

-7.8%

Click on to enlarge

Supply: Firm Information, Khaveen Investments

In our earlier protection, we projected the corporate’s 2023 income based mostly on its historic 5-year common development fee. Our forecast was increased in comparison with its precise 2023 income development of 11.6%, attributed primarily to the unanticipated market headwinds highlighted by administration.

Finish Market Progress

Market CAGR

Lattice’s 5Y Common

Computing and Communication

14.6%

16.6%

Industrial and Automotive

12.96%

23.7%

Shopper

6.60%

-9.3% (4Y common)

Click on to enlarge

Supply: Grand View Analysis, Khaveen Investments

Evaluating the market CAGR and the corporate’s 5-year historic common income development, we noticed that these two are barely consistent with the Computing and Communication section (14.6% and 16.6%). Nonetheless, for the Industrial & Automotive and Shopper section, the market CAGR differs considerably from the corporate’s historic common development. Subsequently, we consider that basing our forecast on its historic development is extra in line than utilizing market CAGR. Nonetheless, we additionally took into consideration the administration steering for the corporate in 2024 the place administration expects Q1 income to be between $130 mln to $150 mln with Q2 sudden to rise considerably however H2 revenues to be increased than H1, reflecting enhancing market situations and its new Nexus and Avant product launches in that interval.

Lattice Income Forecasts ($’000s)

2023

2024F

2025F

2026F

Communications and Computing

257,536

236,241

264,274

305,582

Progress % (YoY)

-6.3%

-8.3%

16.6%

15.6%

Industrial and Automotive

433,482

392,581

472,879

580,030

Progress % (YoY)

35.7%

-9.4%

23.7%

22.7%

Shopper

46,136

47,771

41,740

37,854

Progress % (YoY)

-6.0%

3.5%

-9.3%

-9.3%

Complete Income

737,154

676,592

778,893

923,466

Progress % (YoY)

11.6%

-8.2%

18.9%

18.6%

Click on to enlarge

Supply: Firm Information, Khaveen Investments

Total, we forecasted the corporate’s complete income to say no by 8.2% in 2024 based mostly on administration steering reflecting the anticipated market headwinds highlighted within the first half and the potential restoration within the second half. In 2025 and past, we forecasted the income development for every section based mostly on the up to date 5-year historic development fee. Significantly for the Shopper section, we used 4-year previous development as the corporate restructured this section in 2019 by winding down its smartphone merchandise.

Danger: Competitors in FPGAs

AMD (Xilinx) not too long ago introduced the event of low-cost Spartan UltraScale+ FPGAs highlighting their excessive I/O-to-logic-cell ratios and superior safety features, together with “NIST-approved post-quantum safety” and tamper-resistant circuits. This improvement is prone to pose challenges to Lattice’s low to mid-range FPGAs. As AMD is the main participant within the FPGA market by market share, we consider Lattice might face elevated competitors, prompting them to innovate additional to keep up their aggressive edge within the low-cost FPGA section. Moreover, we consider that Renesas, a brand new entrant into the FPGA market, might additional result in intensifying competitors.

Verdict

All in all, regardless of anticipated market development headwinds in 2024, our evaluation signifies a powerful potential for Lattice to maintain development by increasing its product portfolio in low- and mid-power FPGAs. We anticipate important strides from the corporate’s growth into the mid-range FPGA market. Nonetheless, we additionally take notice that whereas Lattice’s mid-range FPGAs outperform Microchip’s choices, they nonetheless lag behind trade leaders like AMD and Intel, although the corporate’s roadmaps indicated future product developments which may see enhancements in product efficiency to higher compete towards main gamers. Moreover, we consider that Lattice may benefit from the sturdy development in AI-related functions equivalent to information facilities, AI-enabled PCs, and ADAS programs as our market evaluation confirmed a median CAGR of 35.9%, surpassing the administration’s forecasts. Delving deeper into end-market prospects for FPGAs, we recognized key development drivers throughout numerous finish markets and the way Lattice is capitalizing on these drivers. Total, we consider that Lattice is poised to capitalize on the rising demand for AI functions, additional strengthening the corporate’s place within the FPGA market.

Primarily based on a reduction fee of 13.4% (firm’s WACC), and terminal worth based mostly on its 5-year common EV/EBITDA of 49.77x, our mannequin reveals an upside of 25.95%. As well as, our up to date mannequin reveals the next upside as we beforehand used the trade’s EV/EBITDA ratio, which was solely 20.13x. We up to date the ratio as the corporate’s historic EV/EBITDA was considerably increased than the trade common (27.78x). Primarily based on our up to date DCF, we obtained a worth goal of $99.57 and improve the corporate to a Purchase score.