It's been a long road downhill for Xilinx (XLNX). The pioneer of field-programmable gate arrays (FPGAs) -- a widely used circuit that can be reprogrammed post-manufacture -- got hit in 2019 as the trade war between the U.S. and China heated up. With the coming economic fallout from the coronavirus lockdown, the company's growth prospects for the immediate future look grim. Share value has been nearly cut in half from all-time highs reached early last year.  

However, Xilinx is well-positioned to ride out the storm. Profit margins remain high even though sales have tumbled, and the balance sheet is in good shape. The stock can't yet be called a value play, but it's worth keeping an eye on as the global economic situation evolves in the coming months.

A close-up picture of a Xilinx FPGA chip.

Image source: Xilinx.

Transitioning from hardware to a tech platform

Field-programmable chips have been around since the 1980s when Xilinx introduced them, but the explosion in data-center construction and new telecom networks, and the tidal wave of connected things in recent years have been a boon for this type of semiconductor. However, as is common with all things manufacturing, the FPGA market leader has had some new challengers in recent years. Chip giant Intel (INTC -0.42%) purchased FPGA maker Altera back in 2015 and added Omnitek last year to its programmable segment. NVIDIA (NVDA 3.75%) and its graphics-processing units also compete with FPGAs for many of the same end-uses.

To combat the ever-present risk of getting commoditized, Xilinx has been investing in new applications for its chips, including data centers, 5G networks, AI, and connected devices. It has also been transitioning from a simple seller of hardware to a platform company -- a unified strategy that not only supplies chips but also developer kits and software to help speed up product application.  

Though revenue has tumbled thanks to a recent slowdown in its network- and data-center buildout, Xilinx has been able to maintain high profit margins and is getting strong returns on its investments.  

XLNX Operating Margin (TTM) Chart

Data by YCharts.

Ample cash and low debt

When the good times are rolling, it's easy to forget about the balance sheet and become hyper-focused on the income statement. In this regard, I'm guilty and have spent little time giving the rundown on the former. It's time to remedy that.

The good news is that Xilinx's balance sheet is solid. At the end of the calendar year 2019, the chipmaker had $2.43 billion in cash and equivalents (about two years worth of operating expenses) and only $1.25 billion in debt. With further uncertainty clouding Xilinx's immediate business prospects, the company at least has ample liquidity to fall back on. Paired with its strong profit margins, the FPGA maker should be just fine.  

But then there's the issue of valuation. Shares trade for 19.8 times trailing 12-month free cash flow (money left after cash-operating and capital expenses). So it isn't exactly a hot deal after the precipitous fall in the market. However, valuation is driven by future potential, and the digital world is getting a big bump from the coronavirus lockdown. Cloud computing and connectivity were already fast-growing industries before the pandemic, so Xilinx should enjoy growth once more when the short-term situation normalizes.  

Thus, Xilinx remains in my portfolio, and while I'm not currently buying, I will be closely watching when the chipmaker next reports earnings -- likely at the end of April or beginning of May.