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Does Xilinx's New and Improved Guidance Make It a Buy?

By Harsh Chauhan – Jul 9, 2020 at 8:27AM

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The chipmaker surprised Wall Street with a guidance lift, but there's more than what meets the eye.

The broader market recovery has lifted Xilinx (XLNX) stock significantly higher over the past four months, and the company has now given investors another reason to celebrate. Shares of the chipmaker got a shot in the arm after management upgraded its guidance for the first quarter of fiscal 2021 that ended on June 27.

Xilinx expects revenue between $720 million and $734 million this quarter as compared to its original guidance of $660 million to $720 million issued in April. The semiconductor specialist was wary of the ill effects of the novel coronavirus pandemic on its business at that time, but the new numbers suggest that the impact hasn't been as harsh as it had expected.

Person with their finger on the buy button of a keyboard

Image source: Getty Images.

A short-term boost

According to Xilinx's original guidance, its revenue was on track to decline around 18% year over year in the first quarter of fiscal 2021. The midpoint of the new guidance range suggests that the decline wouldn't be as great. But investors should still brace for a substantial revenue drop of nearly 14.4% year over year, as Xilinx had generated $850 million in revenue during the prior-year period.

The company credits the improved guidance to an uptick in demand from data centers and its wired and wireless businesses. There was, however, a short-term boost that may have played in Xilinx's favor. According to CEO Victor Peng, "A portion of the revenue strength in the quarter was due to customers accelerating orders following recent changes to the U.S. government restrictions on sales of certain of our products to international customers."

This indicates that Huawei, which is a key customer for the chipmaker, may have accelerated purchases of Xilinx's chips before the ban kicked in. The blanket ban on the sale of American products to Huawei was supposed to kick in on April 1, but the U.S. Commerce Department postponed that deadline to May 15 initially. The Commerce Department amended the ban last month when it announced that American companies can work with the Chinese telecom giant to develop 5G technologies and standards.

These developments may have benefited Xilinx's business during the recently concluded quarter. However, the chipmaker maintains that it isn't baking the Huawei business into its forecasts, which is the right thing to do. The Federal Communications Commission recently designated Huawei as a national security threat, which means that internet providers in the U.S. won't be able to buy Huawei equipment from federal subsidies.

Additionally, the U.S. has decided to restrict high-tech exports to Hong Kong, which is another sign of growing animosity between the two countries. So, the reliability of Xilinx's Huawei business continues to remain under question, indicating that the boost that it got last quarter may not be sustainable.

The second-quarter guidance doesn't inspire much confidence

Xilinx expects its fiscal 2021 second-quarter revenue to be in line with the first quarter. The chipmaker had reported $833 million in revenue in the fiscal second quarter of 2020. This suggests that Xilinx's top line is on track to drop in the double digits once again year over year  when second-quarter 2021 earnings are released in the fall. 

All this updated guidance makes Xilinx stock a hard sell right now thanks to its rich valuation. It trades at nearly 32 times trailing earnings, which is higher than its five-year average P/E ratio of 28.5. The forward P/E ratio of 34.5 doesn't inspire much confidence, either.

Additionally, investors shouldn't forget that Xilinx was facing challenges even before the pandemic arrived. Betting on a turnaround at Xilinx in these uncertain times doesn't look like a good idea despite the guidance lift. There are a few bright spots in the company's business that could drive long-term growth, but there may be better opportunities to buy Xilinx stock down the road when it becomes attractively valued and regains its mojo.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Xilinx. The Motley Fool has a disclosure policy.

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