Xilinx (XLNX) stock was already in a spot of bother before the novel coronavirus pandemic wrecked the stock market, but one Wall Street firm actually has a positive view of the company's prospects. Xilinx stock was upgraded from neutral to buy by Goldman Sachs recently on the back of a potential turnaround in the communications business and data center strength.
That may seem surprising right now since Xilinx's primary catalyst tailed off coming into 2020 as 5G (fifth generation) wireless deployments lost pace. The chipmaker saw a double-digit drop in its top line in the last reported quarter, while its net income was down by nearly a third over the prior-year period. Xilinx also pointed out on the last earnings conference call that its wired and wireless business will decline for the full year.
Despite these headwinds, Goldman analyst Toshiya Hari sees an attractive opportunity in Xilinx. Hari has increased his price target to $100, indicating a 25%-plus upside from current levels.
Goldman is counting on a couple of tailwinds
Goldman believes that Xilinx's communications business is close to hitting a bottom. The problem is that Xilinx itself had admitted in January that it is witnessing a slowdown in the roll-out of 5G networks "across multiple regions as many operators take a pause before the next wave of infrastructure deployment."
The loss of 5G momentum led to an 18% annual decline in Xilinx's wired and wireless business revenue in the fiscal third quarter. Xilinx gets 31% of its total revenue from this segment. A turnaround in this business could give Xilinx's top and bottom lines a nice boost in the coming quarters, and Goldman seems to be counting on the same.
As it turns out, Xilinx believes that its 5G opportunity hasn't run out entirely and growth in its communications business could return in the long run. But for that to happen, 5G deployments will have to gain pace once again. One hope for Xilinx is China, where the government is aiming to deploy 300,000 5G base stations by the end of the year as compared to the current count of 75,000 base stations.
Xilinx could take advantage of this roll-out thanks to its relationship with Huawei, which recently won 57% of China Mobile's latest 5G tender. But at the same time, Xilinx investors shouldn't miss the fact that 5G deployments in other areas such as Europe will be delayed on account of the COVID-19 pandemic, according to a Huawei executive.
So, it remains to be seen if Xilinx's communication business has actually bottomed, as a turnaround in this segment will be critical to the stock's performance.
The investment bank is also counting on secular growth in the chipmaker's data center business. But this segment supplied just 9% of the total revenue last quarter, so it may not move the needle as much as the communications business would. Meanwhile, the broader slowdown in the semiconductor industry may negatively affect the chipmaker's prospects and weigh on a potential turnaround.
Uncertain times ahead for Xilinx
The economic fallout of the novel coronavirus outbreak could weigh heavily on nearly 60% of Xilinx's business. The company gets 40% of its revenue from the industrial and aerospace and defense business, while another 19% comes from the automotive and consumer businesses.
IDC estimates that there is an 80% chance of substantial contraction in global semiconductor sales this year on account of the pandemic. The firm forecasts that 2020 semiconductor revenue could fall 6% in its most likely scenario, as compared to an earlier expectation of 2% growth.
Xilinx is likely to feel the heat of this contraction. For instance, demand for the company's automotive chips could take a hit, as IHS Markit predicts a 23% decline in global auto sales as compared to last year. Meanwhile, the aviation industry is under great stress because of the COVID-19 outbreak, so the demand for new chips could dry up as airlines scramble to reduce costs.
Not surprisingly, analyst estimates compiled by Yahoo! Finance point toward further weakness in the company's top line in fiscal 2021. In all, betting on a turnaround at Xilinx and expecting it to become a growth stock in these uncertain times does not seem like a great idea.