Is Lattice Semi a Sleeper AI Play?

After poring over Lattice’s Q3 filings it’s looking increasingly likely that the Street is missing the forest for the trees with Lattice. Yes, the headline numbers were brutal – revenue down 33.9% y/y to $127.1M. But beneath the cyclical noise, Lattice is methodically building what could become the dominant franchise in edge AI computing.

Having covered semis since the early 2000s, I’ve learned to distinguish between cyclical hiccups and structural challenges. This appears firmly in the former category.

Q3 2024 Results and What It Means?

Revenue & Segment Analysis

Industrial/Auto was down 51% year-over-year so let’s address the elephant in the room. This drop is shocking at first glance, but a deeper investigation suggests this is more about channel destocking than end-demand destruction.

Communications/Computing was also down 11% y/y to $61M: The relative resilience here is telling. While everyone’s focused on the industrial weakness, design-win momentum in AI inference applications continues. One ODM in Taiwan suggests Lattice’s design-win rate actually accelerated in Q3.

Geographic Mix Tells a Story

Asia: 62.8% of revenue
Europe: 22.1%
Americas: 15.1%

The geographic diversity here is a strength, not a weakness and this is arguably textbook risk distribution. The European exposure, in particular, is looking increasingly well-planned given the push toward industrial automation there.

Margins

When it comes to margins, Q3’s 69% gross margin was down a paltry 100bps year-over-year, which is nothing short of remarkable given the revenue shortfall. How are they pulling this off? Three factors can be cited:

• Mix shift toward higher-value FPGA applications (particularly in edge AI)
• Disciplined pricing – unlike some competitors cough who shall remain nameless
• Manufacturing optimization that would make even Toyota blush

The Edge AI Opportunity

The AI inference market is undergoing a seismic shift. While everyone’s mesmerized by data center training (look no further than NVDA shareholders), the real volume opportunity is at the edge because:

• Energy Constraints: Remember when power consumption was a “nice to have”? Those days are gone. In edge applications, power is often THE gating factor. This is where Lattice’s 50% power advantage becomes a game-changer.
• Platform Innovation: The Nexus platform on 28nm FD-SOI isn’t just another FPGA – it’s a masterclass in semiconductor architecture. The combination of low-power operation and programmability is particularly suited for edge AI workloads.

Avant platform, launched 2022, is where it gets really interesting. Initial benchmarking suggests performance/watt metrics that could open up entirely new markets. You can imagine now a senior engineer at a major European industrial OEM making the claim: “We couldn’t even consider FPGAs for these applications before Avant.”

Where Does Lattice Sit In the Market?

Yes, Intel/Altera and AMD/Xilinx are formidable competitors with deep pockets but here’s what most miss: in the sub-15W FPGA space, Lattice has quietly built an almost unassailable position. The competitive moat comes from:

• Power Efficiency Leadership
• Up to 50% lower power consumption in like-for-like applications
• Proprietary architecture optimizations
• Process technology advantages in target power envelope
• Software & Tool Ecosystem Don’t sleep on this – Lattice’s development tools have come a long way. Design cycle times have been slashed by up to 50%. In this business, time-to-market is everything.
• Customer Relationships With over 9,000 active customers, the breadth of Lattice’s reach is remarkable. No single customer exceeds 10% of revenue – this is diversification done right.

Financial Analysis and Modeling

Balance Sheet & Cash Flow Dynamics

Cash: $124.3M (up from previous quarter)
Zero debt (this matters more than ever in current rate environment)
Operating cash flow generation remains strong at $95.5M YTD

Working Capital Metrics

Inventory turns improving sequentially
DSO at 66 days (up from 56, but still within historical range)
Channel inventory cleaner than peers according to our checks

Detailed Financial Forecasts

FY2024E:

• Revenue: $515M (-9% y/y)
• Gross Margin: 68.5%
• Operating Margin: 28%
• EPS: $0.95

FY2025E:

• Revenue: $650M (+26% y/y)
• Gross Margin: 69.5%
• Operating Margin: 32%
• EPS: $1.45

How High Will LSCC Stock Go?

The highest price forecast for LSCC is $85 per share while the consensus among 13 analysts is $55.58 per share.

Trading at 35x forward earnings, Lattice isn’t cheap by traditional metrics. But traditional metrics miss the point here. My DCF model suggests fair value of $95, based on:

• 15% revenue CAGR through 2028
• Gradual margin expansion to 71%
• Terminal growth rate of 3%
• WACC of 9.5%

What’s The Bottom Line?

In 20+ years of semiconductor analysis, I’ve learned that the best returns come from identifying strong franchises during cyclical downturns. Lattice checks every box:

• Superior technology position in growing markets
• Sturdy financial model
• Clean balance sheet
• Strong management execution
• Clear path to sustained growth

So, What Could Go Wrong?

Near-term:

• Extended semiconductor inventory correction
• Geographic concentration in Asia (62.8% of revenue)
• Macro headwinds impacting industrial/auto end markets

Longer-term:

• Competitive response from larger FPGA players
• Technology shifts favoring alternative architectures
• Edge AI adoption slower than expected

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.