For years now, we’ve been promised self-driving cars, refrigerators that can order milk themselves when they’re running low and homes that can “self-adjust” their own utility consumption to lower costs.

The problem is, all that life changing technology requires access to blindingly fast data networks that won’t bottleneck.

That’s where 5G comes in.

Speed Is the Key

5G is a major upgrade to wireless networks, running up to 100 times 4G network’s speed and enabling many cutting-edge technologies.

It also has extremely low latency, or the delay that occurs when transmitting data. It can also carry more data more reliably, enabling up to 1 million connections per square kilometer compared to the 1,000 connections that 4G can handle.

The 5G upgrade is a huge step towards making driverless cars a reality.

Autonomous vehicles generate about 4,000 gigabytes of data a day, all of which is transmitted back to the manufacturer and analyzed.

4G networks just can’t keep up with that kind of load. And while the 50-millisecond latency on 4G isn’t bad, latency drops to less than 1 millisecond on 5G, improving the flow of data and commands back and forth to the vehicle.

The Internet of Things is another important driver of the 5G revolutions.

These days everything from your television to your refrigerator to your electric meter is connected to the internet. Cisco (NASDAQ: CSCO) estimates that this year, there will be more than 50 billion networked devices. By 2024, there will be more than 1 trillion.

Only the 5G network will be able to handle all those connections.

That means smart cities, virtual reality, mobile payments and, yes, autonomous vehicles will finally be able to become a reality.

That’s going to require a massive infrastructure spending program on the part of telecoms, and we have a company that will capture a large percentage of that.

Small Chip, Big Profits

Lattice Semiconductor (NASDAQ: LSCC) makes a critical component for the 5G revolution.

Field programmable gate arrays (FPGA) are logic chips that users (instead of manufacturers) can program to serve a slew of functions.

In the 5G context, FPGAs perform control functions, are used in power management applications and bridging different components together.

And it will take a lot of FPGAs to make 5G work.

While the 4G network runs on a network of about 200,000 or so cell towers across the U.S., 5G requires a denser network of towers to handle all the traffic. In fact, in dense urban areas, it might take a “tower” on every corner for the 5G network to run at full capacity.

So dense, the former FCC Chairman Tom Wheeler said 5G towers would multiply like “Tribbles on the Starship Enterprise.”

Personally, I like the sound of that. That means A LOT of chip demand.

That’s why revenue is expected to grow roughly 3% this year and nearly 10% in 2021; EPS is expected to grow 15% this year and an additional 20% in 2020.

Despite that projected growth, Lattice is undervalued at the moment.

Why?

It hasn’t always been the best run company.

In years past, Lattice tended to chase every potential market opportunity. That meant it often got into business lines that, frankly, just wouldn’t work out.

Instead, it has decided on providing low-power FPGAs for 5G, artificial intelligence applications, servers, industrial and automotive applications and the Internet of Things. All powerful, secular trends in play right now.

By just focusing on low-power FPGAs, Lattice’s addressable market is still worth about $3 billion today and is expected to more than double as the 5G rollout continues. Remember, it takes nearly twice as many 5G towers to achieve the same coverage as 4G.

And 5G towers take a lot more FPGAs.

It also had an odd R&D strategy – essentially developing products from scratch to meet every potential application.

That meant there was a lot of good money chasing after bad.

But, over the past year the executive team has almost entirely turned over.

CEO James Anderson, who used to be at AMD (NYSE: AMD), which isn’t a player in the FPGA business, but gave him a good grounding in the chip business.

New Chief Marketing and Strategy Officer Esam Elashmawi was formerly at Microsemi’s FPGA business, the new VP of Worldwide Sales was general manager of Intel’s (NASDAQ: INTC) Programmable Solutions segment. The new Chief of Research and Development had a similar role at Xilinx, Lattice’s only major competitor.

Lattice’s board has clearly made a lot of good hiring decisions.

The company has shed unproductive markets and products. And while top-line growth has been relatively modest recently, it has been reducing costs and paying down debt to improve profitability.

One of the ways it has reduced costs is by revamping its R&D process.

Instead of starting from scratch, Lattice is now working to develop new uses based on its existing platforms. That radically speeds up the process and saves a lot of money – to the tune of $2.2 million in the most recent quarter – while still allowing for groundbreaking innovation.

In its fiscal first quarter alone, adjusted earnings per share more than doubled year-over-year, following a 200% year-over-year in fiscal 2019.

But, given Lattice’s history, it’s improving performance isn’t getting a lot of love.

In fact, it’s closest competitor Xilinx (XLNX) is currently trading at 7.6 times sales and 9.3 times book value, even though it isn’t growing as rapidly. Right now, Lattice is just at 6 times sales and 8 times book.

If Lattice sticks to its new strategy – and I see no reason why it won’t – I believe that valuation gap will close over the next year.

If that gap closes and earnings continue growing, that means Lattice could easily be a $40 stock by this time next year – IF NOT SOONER.

Recommended Action: Buy Lattice Semiconductor up to $40.

Yours in Profits,

Ian Wyatt