Lattice Semiconductor (NASDAQ: LSCC) appears expensive. Discounted cash flow models, using conservative growth assumptions, often land well below today’s market price.
Price-to-sales sits around 17×, well above the semiconductor industry average near 4×, and price-to-earnings has reached levels that would make traditional value investors uncomfortable.
But these models have a weakness, they rely on historical averages in a fast-changing industry. They rarely account for new product cycles, market expansions, or changes in competitive dynamics that could structurally alter a company’s growth trajectory. In Lattice’s case, the numbers don’t fully capture how it has evolved from a commodity chipmaker into a high-value solutions provider.
Evolution from Chips to Systems
Lattice’s transformation over the last decade is not fully appreciated. Once considered a low-end FPGA supplier, management pivoted toward high-margin, low-power programmable logic devices tailored for specific applications. This was a purposeful shift toward being an indispensable part of customers’ designs.
The company now offers full solution stacks, bundling silicon with software, IP cores, and development tools. Its sensAI stack targets edge AI workloads, mVision enables advanced computer vision applications and automate serves industrial automation while Sentry focuses on hardware security.
These reduce customer time-to-market, integrate deeply into their design cycles, and create long-term switching costs.
Power of Low-Power Leadership
Lattice has turned that trade-off on its head. Its chips are known for exceptionally low power draw, making them ideal for edge devices, battery-powered systems, and industrial environments where thermal management is a constraint.
This focus is a direct play on two megatrends, such as the rise of the Internet of Things and the growth of AI inference at the edge.
Both require devices that can operate autonomously with minimal energy use, often in environments where power is scarce or heat dissipation is a major design challenge. Lattice is one of the few companies with the engineering focus to excel in this niche.
Why Edge AI Changes the Valuation Game
The AI investment narrative revolves around data center training workloads but inference, where trained models are deployed in the real world, is a far larger and longer-lasting market. Edge AI brings that inference to where data is generated, reducing latency, cutting bandwidth costs, and enhancing privacy.
Lattice’s FPGAs provide just enough compute for specific machine learning tasks, without the power or cost overhead of general-purpose GPUs, putting Lattice in a market segment with fewer competitors, higher margins, and multi-year adoption curves. Analysts modeling LSCC as just another cyclical chipmaker miss this fundamental shift.
After AMD acquired Xilinx, Lattice became the only major pure-play FPGA provider. That independence is strategic gold because it allows for partnership with anyone, cloud vendors, industrial OEMs, automotive suppliers, without the competitive conflicts that can come with being part of a larger semiconductor giant.
It also makes Lattice a potential acquisition target for companies seeking an immediate foothold in the FPGA space. While speculation shouldn’t drive an investment thesis, the logic of such a deal adds a layer of optionality to LSCC shares.
Cyclical Headwinds Are Masking Secular Growth
The past year has been marked by inventory corrections across the semiconductor sector. Lattice hasn’t been immune, with year-over-year revenue down in recent quarters. But quarter-over-quarter trends show stabilization, and management has indicated that customer inventory levels are normalizing.
This is a classic setup where cyclical weakness hides secular strength. Once the broader industry demand environment improves, companies with differentiated products often emerge stronger than before. For Lattice, that inflection could come faster than expected due to the design wins it has banked during the slowdown.
Valuation Through a Different Lens
If you base the investment case purely on near-term earnings multiples, Lattice looks expensive. But if you consider its total addressable market expansion, rising recurring revenue from software stacks, and the scarcity value of its independence, the story shifts.
Even modest market share gains in automotive, industrial automation, and edge AI could drive mid-teens annual revenue growth over the next five years. Layer in the high margins, and earnings growth could compound faster than most models currently predict. Under those conditions, today’s multiples might look far more reasonable in hindsight.
Pitfalls To Watch
This isn’t a risk-free story. Lattice still competes with giants like Intel (through Altera) and AMD, both of which have the scale to undercut on price if they choose. The company also relies heavily on contract manufacturing, meaning supply chain disruptions could impact its ability to meet demand.
Another consideration is market sentiment. A sharp rotation out of growth stocks, or broader market weakness, could hit LSCC’s valuation regardless of fundamentals. That makes timing less predictable, even if the long-term story is strong.
Undervalued or Just Underappreciated?
By classic valuation metrics, LSCC is not undervalued, it’s expensive. But the numbers alone fail to account for the strategic depth of its transformation, its leadership in low-power programmable logic, and its increasingly sticky software-driven ecosystem.
If you believe the edge AI and IoT markets will expand as forecast, and that Lattice’s design wins today will translate into revenue streams tomorrow, the stock’s premium makes more sense. For long-term investors willing to hold through cycles, Lattice may not just be fairly valued, it could be trading at a discount to its real future earnings power.
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.