This Chipmaker Is a Good Investment, Are You Watching?

Strong end-market prospects and an industry-leading position make this tech stock worth watching.

Jan 19, 2014 at 4:00PM

Chipmaker Xilinx's (NASDAQ:XLNX) performance in 2013 wasn't outstanding, as its gain of 30% trailed the broader market and the Philadelphia Semiconductor Index. However, it makes sense to have a stock such as Xilinx considering its diversified business and solid dividend yield. In addition, the company is well-positioned to benefit from China Mobile's (NYSE:CHL) 4G roll-out, improvement in the industrial end-market, and an industry-leading position in the 28-nanometer manufacturing process, where it leads the likes of Altera (NASDAQ:ALTR).

China Mobile boost
The prospects in Xilinx's end-markets look quite promising, which is why the stock could turn in a decent performance once again in 2014. Xilinx is a key supplier to Huawei and ZTE, which are among the primary beneficiaries of China Mobile's LTE roll-out. China Mobile had selected nine vendors last year to deploy its network, and both Huawei and ZTE were among the winners. Going forward, Xilinx should see strong business from its Chinese customers as deployment of LTE gains pace.

According to ZDNet, China Mobile is projected to spend approximately $13.5 billion on its LTE network, covering more than 350 cities by the end of the year. The carrier plans to build more than 500,000 base stations by the end of 2014, and this should spur demand for Xilinx's programmable chips.

A commanding position
Nomura analyst Romit Shah believes that the programmable logic devices (PLD) market is expected to rise 10% this year to $4.7 billion. The 28-nanometer platform is expected to account for a fourth of PLD revenue, and Xilinx commands 70% of this platform.  

This 28-nanometer chip platform has been a key growth driver for Xilinx, as it drove the company's revenue from new products up by 22% in the last-reported quarter. In addition, Xilinx is able to command a higher margin through this platform, as evidenced by a 400-basis-point increase in gross margin last quarter. 

Now, Xilinx is looking to further improve its position by introducing a 20-nanometer chip platform. It shipped the industry's first 20-nm programmable chip in November, which addresses a wide range of applications such as data centers, defense systems, and wireless connectivity. Xilinx is seeing good demand for its new products and its innovation should keep momentum going in the future as well.

An improving industrial market
Xilinx closed 2013 on a weak note, as its outlook for the recently concluded third quarter wasn't up to expectations, primarily due to weakness in the industrial business. However, the industrial outlook for 2014 remains quite upbeat and could bring Xilinx back on track.

According to the Manufacturers Alliance for Productivity and Innovation, the U.S. industrial outlook for 2014 and 2015 is strong. Manufacturing production is expected to rise 3.1% this year, bettering last year's growth of 2.1%. On the other hand, traditional manufacturing is expected to improve 3%, compared with the 2% growth seen in 2013.

As industrial production picks up, Xilinx's programmable chips should, ideally, see more demand. Additionally, considering the strength that has already been seen in its communications business, it won't be surprising if Xilinx posts good growth this year.

A thing to watch for
Xilinx needs to be wary of Altera, which has reportedly taken market share away from Xilinx. Last year, Xilinx saw one of its customers, probably Ericsson, move to Xilinx. However, Xilinx still managed to post growth in its communications business, despite Ericsson's reported move away.

But then, Altera is aggressively developing its own class of 20-nm and 14-nm chips. Altera believes that it will be able to make a serious dent in Xilinx's market position in the future with its 14-nm chips, as it expects to capture nearly 50% of the industry's revenue within five years.

Xilinx has been executing well and its innovations are finding good traction already. In comparison, Altera is seeing weakness in its business and its market share lags behind Xilinx. Hence, it might be quite some time before Altera catches up to Xilinx, but by then, even Xilinx would have bolstered its R&D efforts further.

The bottom line
Xilinx had performed well last year and the same could continue in 2014 as well. There was a slight hiccup toward the end of 2013, but the prospects look robust going forward. With LTE deployment in China, an upswing in the industrial market, and strong automotive sales, Xilinx should be able to continue its steady and stable performance.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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