Xilinx (XLNX) and Micron Technology (MU -0.85%) faced identical challenges in 2019 thanks to the U.S.-China trade war. The chipmakers had to suspend shipments to Huawei as the Chinese telecom giant was added to the U.S. government's Entity List. Micron faced the additional challenge of tumbling memory prices in light of weak demand and oversupply.
Micron, however, seems to have turned a corner. The stock has regained its mojo of late thanks to improving memory market conditions. But Xilinx investors haven't benefitted from the same level of interest and the stock continues to languish after showing great promise earlier in 2019.
But does this make Xilinx a bad bet when compared to Micron, especially considering that both companies stand to gain from identical catalysts? Let's find out.
The case for Micron
Micron Technology is back in the good graces of investors as it claims that its financial woes will bottom out in the current quarter. CFO David Zinsner made this clear on the Q1 fiscal 2020 earnings conference call in mid-December:
However, we are encouraged by recent market trends and expect that [Q2 fiscal 2020] will be the bottom of our gross margins, as pricing, an increasing mix of high-value solutions, and cost reductions drive better gross margins throughout the rest of fiscal and calendar 2020. We expect a gradual recovery to start in FQ3, and to continue into the seasonally stronger second half of calendar year.
Zinsner also added that price declines of dynamic random access memory (DRAM) have decelerated, while NAND flash memory prices are on the rise. Micron believes that the memory market's demand/supply balance will keep improving thanks to increased demand from data centers, fifth-generation (5G) wireless networks, and console gaming.
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Micron says that DRAM content in data centers is increasing thanks to the need for more memory and storage capabilities to tackle artificial intelligence (AI) workloads. As a result, the amount of DRAM used by a typical cloud server should increase. Micron management believes that demand for cloud DRAM could grow at a faster pace than the company's own forecast next year.
Data centers could also drive Micron's NAND flash business next year as they turn to solid-state drives (SSDs) to enable faster performance and low power consumption. Micron CEO Sanjay Mehrotra pointed out that the "average density, as well as the average usage of flash in clouds and data center applications, continues to increase."
According to a ResearchAndMarkets.com estimate, flash storage in data centers is expected to increase at an annual rate of nearly 17% through 2024. This should pave the way for continued improvements in Micron's NAND flash business.
Finally, the memory specialist's DRAM business will get a shot in the arm from the arrival of 5G smartphones next year. Seoul-based financial services provider KIWOOM Securities estimates that demand for mobile DRAM is on track to jump 22% next year as 5G devices gain critical mass. Micron is now in a stronger position to take advantage of that growth as the company has been granted permission to ship to Huawei.
All of this indicates that the demand/supply balance in the memory industry should continue to improve in the coming quarters and help Micron turn its business around.
The case for Xilinx
Xilinx was an early beneficiary of 5G networks. The company clocked tremendous growth when deployment of 5G networks began in South Korea in early 2019, but it eventually lost its wheels thanks to the broader semiconductor slowdown and restrictions imposed on Huawei.
Xilinx pointed out in October that it hadn't received any license approvals from the Commerce Department that would have allowed it to resume shipments to Huawei. As a result, the company had to recalibrate its guidance for the full year as Huawei was anticipated to account for 6% to 8% of the company's total revenue this year.
But now that Micron has posted a positive development on the Huawei front in the wake of the U.S.-China trade deal, Xilinx could get back its mojo as well. More importantly, Xilinx's 5G business can get a shot in the arm next year as 5G deployments are expected to gather pace in more countries.
So far, the chipmaker has benefited from 5G deployments in China and South Korea, and in Japan to some extent. A Gartner report points out that 5G deployments in countries such as the U.A.E., Spain, Qatar, Sweden, Germany, and France will gain pace in 2020. As a result, 5G wireless infrastructure investments could swell from an estimated $2.2 billion this year to nearly $4.2 billion in 2020.
This means that Xilinx's 5G opportunity is still alive. The possible restart of shipments to Huawei and acceleration in 5G deployments could continue to fire up the chipmaker's wireless networks business in 2020.
Meanwhile, the 5G bump could also drive up demand for Xilinx's field-programmable gate array (FPGA) chips. We have already seen that data center upgrades are in the cards in a bid to tackle more complex workloads thanks to AI. Now, FPGAs are turning out to be a key component of AI-focused data centers, as they are capable of accelerating workloads with less power consumption.
Amazon (AMZN -0.82%), for instance, recently deployed FPGAs in Advanced Query Accelerator (AQUA) -- a new Amazon Web Services (AWS) application. Amazon claims that AQUA is 10 times faster than its rivals, which is proof that using FPGAs in data centers has its advantages.
Not surprisingly, a third-party research report points out that FPGAs are going to be the fastest-growing data center accelerators in the coming years. This is great news for Xilinx as the data center accelerator market itself is expected to grow at almost 50% a year through 2023, according to the report.
All these catalysts could help Xilinx step up its game next year. According to analyst estimates compiled by Yahoo! Finance, Xilinx's top-line growth could hit almost 10% in the coming fiscal year after this year's 6% growth.
The verdict
It can be concluded that both Xilinx and Micron are turnaround plays. But which of these two stocks are worth betting on depends on an investor's risk profile. That's because Xilinx is the safer bet as it has managed to deliver double-digit revenue growth in difficult times, while Micron's performance has been way off the mark.
MU Revenue (TTM) data by YCharts
Micron's dependency on the memory price cycle is a risk that investors need to watch. If memory prices don't recover as the memory specialist anticipates, its rally could fizzle out next year. Xilinx, on the other hand, isn't dependent on any such cycle. The company looks poised to take advantage of secular growth trends in 5G and data centers, so it could turn out to be a better growth stock in 2020 as compared to Micron.
