Some Risks for Lattice Semi

Our recommendation stays Hold on Lattice Semiconductor (LSCC - Snapshot Report), a fabless OEM of programmable logic devices. We arrived at this conclusion after the company's performance in both the top and bottom lines exceeded consensus estimates in the March quarter. The forward revenue guidance is also looking at a revenue growth of 1-5% increase in the second quarter.

The company has also entered the high-growth FPGA market by acquiring Agere's FPGA division. The management expects to make significant inroads into the low-end, high-volume segment of the FPGA market. But here comes the catch: Lattice's small size, aggressive pricing strategy and fierce competition from market leaders increase execution risk.

The company's shares are currently trading at a 55.7x multiple of price to our 2008 P/E. The company is starting to see the ramp of some new products and revenue from them is expected to gain traction in 2008. However, Lattice has low-gross and operating margins and new product development costs could continue to pressure the bottom line.

The potential of the stock is centered on the FPGA market, and we are encouraged by the growth in FPGA sales in the first quarter. However, we think that under the recessionary conditions in the U.S., growth could lag expectations.

So, we are reiterating our $5.00 target price. We believe that share appreciation is tied to a pickup in revenue, and we believe revenue growth will continue to pick up through 2008.

Sejuti Banerjea has contributed to the report.

Read the full analyst report on LSCC

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