Lattice Semiconductor shares drop over 10% on weak Q2 results and BofA downgrade: Time to sell or hold?

Lattice Semiconductor Corp. (NASDAQ: LSCC) experienced a significant drop in its stock price today, opening down over 10% following a disappointing Q2 earnings report and a stark downgrade from Bank of America.

This sharp decline has investors questioning whether to sell or hold onto their shares.

On Tuesday, Bank of America analysts led by Duksan Jang revised their stance on Lattice, downgrading the stock from “Neutral” to “Underperform” and slashing the price target from $83 to $47.

This adjustment was prompted by Lattice’s Q2 revenue falling below the midpoint of its guidance and a subdued forecast for Q3, with anticipated sales between $117 million and $137 million—well below the expected $141.12 million.

Q2 earnings report

Lattice, known for its programmable logic devices, reported a Q2 revenue of $124.1 million, marking a significant 35% year-over-year decline and a notable drop from $140.8 million in Q1.

The downturn in revenue was accompanied by a stable yet lower year-over-year GAAP gross margin of 68.3%, and a non-GAAP net income of $31.4 million, translating to $0.23 per share.

Despite these challenging figures, Lattice remains optimistic about its long-term growth potential, underscored by ongoing expansions in its product portfolio.

Analysts’ views amid CEO reshuffle

Other analysts have also expressed concerns about Lattice’s near-term prospects.

In April, Baird analyst Tristan Gerra emphasized the need for a “steeper recovery” by 2025 to justify the company’s valuation, maintaining a cautious yet optimistic outlook with an “Outperform” rating and a $70 price target.

In contrast, Deutsche Bank dismissed worries related to the recent CEO transition, asserting that the company’s fundamentals remain robust and reaffirming a “Buy” recommendation with an $82 price target.

Amid operational and leadership transitions, Lattice has expanded its FPGA portfolio and strengthened its position in security-focused hardware and software solutions.

The company introduced the Certus™-NX series and the Lattice MachXO5D™-NX family, catering to a diverse range of industrial applications.

This expansion is part of Lattice’s broader strategy to navigate cyclic industry headwinds, particularly in the automotive and industrial sectors.

Valuation concerns

From a valuation perspective, Lattice appears overvalued, trading at a forward earnings multiple above 45, significantly above historical averages.

This has led to a bearish market reaction, reflecting heightened skepticism about the company’s growth trajectory in an increasingly competitive landscape.

Analysts point to slowing server unit growth and potential competitive pressures from major players like Intel as key concerns.

Looking ahead, Lattice aims to leverage its innovations in server content and security solutions to drive growth in upcoming product generations like Granite Rapids/Turin.

However, the company faces the challenging task of aligning its inventory and operational strategies with these long-term objectives, particularly as it navigates ongoing inventory normalization and market saturation challenges.

Bearish momentum may continue

Lattice’s stock has been in a downtrend since September last year when it fell from a high above $96 to $52. Although it made a decent recovery in Q1 this year, it couldn’t sustain those gains and following today’s move has broken below its medium-term swing low near $52, which is not a good sign for the bulls.

LSCC chart by TradingView
Considering that investors who are bullish on the stock must not try to buy the stock in the hopes of a quick turnaround. Unless the stock once again gives a closing above $56.2, no fresh long position should be initiated.

Traders who are bearish on the stock have a low-risk entry on their hands  currently. They can short the stock above $50 with a stop loss at $56.3. If the bearish momentum continues, the stock can fall to its near-term support around $44 where one can book profits.

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