Lattice Semiconductor currently trades at $54.29 per share and has shown little upside over the past six months, posting a middling return of 2.3%. However, the stock is beating the S&P 500’s 4.1% decline during that period.

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Despite the relative momentum, we're swiping left on Lattice Semiconductor for now. Here are three reasons why LSCC doesn't excite us and a stock we'd rather own.

Why Is Lattice Semiconductor Not Exciting?

A global leader in its category, Lattice Semiconductor (NASDAQ:LSCC) is a semiconductor designer specializing in customer-programmable chips that enhance CPU performance for intensive tasks such as machine learning.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Lattice Semiconductor’s 4.7% annualized revenue growth over the last five years was tepid. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Lattice Semiconductor’s revenue to rise by 2.9%. While this projection suggests its newer products and services will spur better top-line performance, it is still below the sector average.

3. Shrinking Operating Margin

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Analyzing the trend in its profitability, Lattice Semiconductor’s operating margin decreased by 6.1 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. Its operating margin for the trailing 12 months was 6.8%.

Final Judgment

Lattice Semiconductor’s business quality ultimately falls short of our standards. Following its recent outperformance in a weaker market environment, the stock trades at 51.3× forward price-to-earnings (or $54.29 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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