Is this small-cap chip stock better than AMD or Intel?

Over the past decade, various companies in the semiconductor industry have been acquired in an effort to consolidate the market. One particular type of chip has received a lot of attention. It’s a Field Programmable Gate Array (FPGA). This chip type is becoming increasingly relevant as it is used in semiconductor design processes, data center artificial intelligence (AI) system design, and industrial and consumer electronics. .

Software also features prominently in FPGAs, as it is used to program (or customize) the chip for the specific application required by the customer.

In 2015, intel (INTC 0.02%) Acquired Altera, a major FPGA player, for nearly $17 billion. And in 2022, AMD (AMD -2.94%) acquired FPGA pioneer and leader Xilinx in an all-stock transaction for approximately $50 billion, completely transforming its business.

These two major mergers effectively left only one company dedicated to FPGAs. lattice semiconductor (LSCC). Despite Lattice’s current struggles, its stock has significantly outperformed Intel’s over the past five years. And Lattice was even better than that until AMD made his latest AI-powered breakthrough. There is one important reason why it may be a much better long-term investment at this time.

Lattice is in a cyclical recession, but how long will it last?

Lattice has had a very successful few years, especially after CEO James Anderson (a former AMD executive) took over and began implementing a strategy to introduce new products. Data centers, industrial automation, and post-pandemic automotive digitization fueled the company’s growth.

Data by YCharts. TTM = trailing 12 months.

But recession has arrived in some of these end markets, hurting not only Lattice but also other companies in the industry that sell large quantities of chips to industrial and automotive customers.

problem? After several years of chip shortages, a slowdown in industrial demand has ushered in an era of chip oversupply. Lattice is currently in short supply of FPGAs to help customers deal with excess inventory. Some of these customers are also postponing implementation of some of the company’s latest chip designs and accompanying software for now.

As a result, the company is experiencing cyclical revenue declines for the first time in a while. During the company’s fourth-quarter earnings call this month, Anderson and his team discussed at length why the first quarter of 2024 will be tough. Sales are expected to be in the range of $130 million to $150 million, down 30% year over year, but Lattice expects business conditions to improve in the second half of 2024 as customer inventory levels normalize. I expect it to improve.

While the recent sharp decline in sales is worrying, Lattice’s upbeat comments about the second half of 2024 are at least in line with what other industrial chipmakers and hardware designers have said.

Lattice has one important advantage

Although the company’s financial situation tends to get worse before it gets better, Lattice has a key advantage in dealing with economic downturns that even AMD and Intel don’t have: sustainable profitability.

Anderson and the company believe Lattice will remain highly profitable in the coming quarters. Even at the low end of its guidance range for the first quarter, the company expects adjusted operating margin to be at least 26%.

This is rock solid given the large-scale economic downturn. When AMD and Intel were in the throes of a cyclical downturn over the past year and a half, profitability had all but dried up.

Data by YCharts.

Of course, chip makers will have to prove it. There is always the possibility that this cyclical downturn will be worse and longer than expected. But at the beginning of the upcoming decline, the small and nimble Lattice looks like his best-in-class FPGA provider, at least from a business model perspective.

The small chip designer and software provider’s shares trade at a premium of approximately 40 times trailing-12-month earnings per share and trailing-12-month free cash flow. But if the company can continue to outperform its larger peers and return to profitable revenue growth later this year, its stock could be worth considering alongside some of the semiconductor industry’s top companies. .