What a fantastic six months it’s been for Lattice Semiconductor. Shares of the company have skyrocketed 99.6%, hitting $148.67. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Lattice Semiconductor, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Lattice Semiconductor Not Exciting?
We’re happy investors have made money, but we’re cautious about Lattice Semiconductor. Here are three reasons why there are better opportunities than LSCC, plus one stock we’d rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore’s Law) could make yesterday’s hit product obsolete today. Lattice Semiconductor’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 9% annually. 
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Analyzing the trend in its profitability, Lattice Semiconductor’s operating margin decreased by 16.2 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Lattice Semiconductor’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 5.3%.
3. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Lattice Semiconductor’s margin dropped by 4.7 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle. Lattice Semiconductor’s free cash flow margin for the trailing 12 months was 26%.
Final Judgment
Lattice Semiconductor isn’t a terrible business, but it doesn’t pass our bar. Following the recent surge, the stock trades at 74.7× forward P/E (or $148.67 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of our top digital advertising picks.
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