Field-programmable gate arrays (FPGAs) are chips that can be reprogrammed to meet specific needs or perform specific functions after they're manufactured, giving developers the flexibility to alter them per the needs of a task. The flexible nature and low power consumption of these chips are giving them solid traction in emerging technologies such as artificial intelligence, big data, and self-driving cars.

Not surprisingly, FPGA demand is expected to shoot up in the coming years. Variant Market Research estimates that FPGA sales will exceed $12 billion by 2024, as compared to $6.9 billion a couple of years ago.

Investors can take advantage of this opportunity through Xilinx (NASDAQ:XLNX), a pure-play FPGA company, or through Intel (NASDAQ:INTC), a chip behemoth with diversified interests, but one of them trumps the other.

Check out the latest Intel and Xilinx earnings call transcripts.

A man stands in front of a wall on which question marks are drawn.

Image source: Getty Images.

The case against Intel

FPGAs are a small part of Intel's business empire, producing less than 3% of the company's total revenue. Chipzilla's programmable solutions group (PSG) generated just over $2.1 billion in revenue in 2018, a jump of 11.6% over the prior year. But the downside is that this business won't be moving the needle much for the chipmaker even if it ends up dominating this market in the coming years.

Intel has generated nearly $71 billion in revenue over the past year, so even if it doubles its FPGA business in the next couple of years, it would still be getting less than 6% of its revenue from this segment. And that's assuming the company's fast-growing data center and Internet of Things businesses stall.

The other problem is that Intel isn't the bigger fish in this space. Xilinx leads in FPGAs with more than half of the market under its control, while Intel has lost ground and plays second fiddle. In fact, it seems Intel's FPGA growth is slowing down, as revenue from this segment increased just 6% last quarter, while operating profit dropped year over year.

A closer look indicates that Intel's programmable solutions business hasn't enjoyed a smooth ride despite the company's massive Altera acquisition nearly four years ago.

Chart showing the performance of Intel's PSG business.

Data from Intel's quarterly reports. Chart by author

Intel is finding it difficult to gain momentum in FPGAs, as evident from the chart above. Additionally, the company is feeling margin pressure thanks to its investment in product development in order to catch up to Xilinx, which enjoys  a technology advantage in the FPGA market.

And it looks like Xilinx's technology lead is helping it grab more contracts that could eventually boost its FPGA market share, leaving Intel further behind in second place.

The case for Xilinx

Xilinx is looking to boost its technology lead over Intel with Project Everest. The chipmaker is looking to improve the functionality of programmable chips with this initiative by bundling together a processor, an FPGA, and fast network connectivity into a single system-on-a-chip (SoC) based on the 7-nanometer (nm) manufacturing process.

For comparison, Intel's current Stratix FPGAs are built on the 14nm process. Chipzilla's competing 10nm will probably not hit the shelves this year, while Xilinx has already showcased its next-generation 7nm chip. This indicates that Xilinx will continue enjoying a tech lead over Intel. That's because a smaller manufacturing node means that Xilinx is packing more transistors into a more compact chip, which allows it to deliver a stronger performance with low power consumption.

So it wouldn't be surprising to see Xilinx increasing its market share by landing more high-profile clients for its FPGA chips. The company has already made some notable progress by scoring contracts with the likes of Alibaba and Amazon, who are using Xilinx FPGAs to power their data centers.

What's more, it seems Microsoft is also prepping to add Xilinx FPGAs to its servers. According to a Bloomberg article, the software giant will reportedly use Xilinx chips to power more than half of its Azure cloud servers. That sounds like a big win for Xilinx, as Microsoft has been known to place FPGA orders with Intel for accelerating AI applications in the cloud.

The good part: Such deals are moving the needle in a big way for Xilinx. The company's revenue was up 34% year over year during the recently reported fiscal third quarter, which led to a 42% jump in the company's earnings. 

The verdict

Intel is a sum of many parts, while Xilinx is solely focused on the FPGA market. Not surprisingly, the latter is able to use the end-market opportunity to good effect by landing deals with major cloud players and accelerating its financial growth. This makes it a better FPGA bet than Intel, but investors will have to pay a pretty price.

Xilinx stock trades at nearly 40 times trailing earnings, though its forward earnings multiple of 26 shows that earnings growth is expected. Investors shouldn't be afraid to pay a premium for this chipmaker, especially considering that it dominates a lucrative market that's set to get bigger with time.