Please ensure Javascript is enabled for purposes of website accessibility

Forget Trade War Uncertainty; Xilinx Is Still a Buy

By Nicholas Rossolillo – Aug 5, 2019 at 8:21AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This chipmaker is still posting stellar growth figures -- with or without the political fallout happening all around it.

The semiconductor industry has been hit particularly hard by the U.S.-China trade war. With a significant amount of the manufacturing process headed up in the east, but headquarters mostly based in the California Bay Area, chipmakers have been hit with a volley of body blows: cross-border tariffs, a Chinese economic slowdown, and a White House crackdown on Chinese telecom equipment manufacturers ZTE in 2018 and Huawei in 2019.

Despite the significant disruption, Xilinx (XLNX) has continued to shine. The programmable chipmaker is benefiting from multiple secular tailwinds blowing strong at its back and helping it plow through the treacherous waters of international trade. After the company's fiscal 2020 first-quarter report (the three months ended June 29, 2019), the stock still looks like a best-in-show pick.

Same story, different day

Granted, Xilinx's last quarterly performance wasn't perfect. Sales to Huawei were suspended during the middle of the quarter to comply with the trade ban, and a digital memory customer started going through a product transition. That slowed down the top-line rate of growth and put pressure on gross profit margin on product sold.

Metric

Three Months Ended June 29, 2019

Three Months Ended June 30, 2018

Change

Revenue

$850 million

$684 million

24%

Gross profit margin

66.2%

69.8%

(3.6 pp)

Operating expenses

$312 million

$262 million

19%

Adjusted earnings per share

$0.97

$0.75

29%

YOY = year over year. Pp = percentage point. Data source: Xilinx.

At the end of the day, though, Xilinx has a lot going for it. Some shipments of older chips to Huawei resumed -- as they did for other American chip makers like Micron -- toward the end of the quarter, but Huawei simply isn't so important as to completely derail Xilinx. There are other wireless infrastructure providers out there as 5G mobile networks start to slowly roll out, and Xilinx's semiconductors are a key component for all of them. When adding in the company's other growth stories in the automotive space, data centers, and anywhere artificial intelligence can be applied, there is more than enough to keep the upward trajectory easily intact.

A man in a suit holding a tablet with an illustrated brain made of electrical connections hovering above it, illustrating artificial intelligence.

Image source: Getty Images.

What to expect next

But what about the guidance for next quarter? Xilinx did call for revenue of $800 million to $850 million -- flat at best with Q1 and up just 7% to 14% year over year. Operating expenses are also expected to be up 16% year over year, which should keep downward pressure on earnings growth. Thus, this semiconductor manufacturer isn't completely immune to the trade war, and a resolution to the dispute and an ease-up on Huawei would certainly be welcome.

Shareholders can nevertheless take solace in the fact that, even in the face of geopolitical unrest, Xilinx can still muster better-than-par performance where so many others are reporting declines in business. That speaks to the company's technology, with its chips a key component in artificial intelligence and other advanced computing networks. 

Still, it is worth noting that continued high-octane growth is priced in. The stock is valued at 27.6 times trailing 12-month free cash flow (what's left over after operating and capital expenditures are paid), and one-year forward price-to-earnings estimates also put shares at 27.6. Not exactly a value investor's dream.

However, Xilinx has demonstrated its ability to turn sales growth into even faster profit growth, and a share repurchase program (over $316 million worth of stock was bought last quarter alone) and a 1.2% annual dividend yield sweeten the deal. Trade war or not, this semiconductor stock is worth a serious look.

Nicholas Rossolillo and his clients own shares of Micron Technology and Xilinx. The Motley Fool recommends Xilinx. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Xilinx, Inc. Stock Quote
Xilinx, Inc.
XLNX

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.