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Can This Growth Stock Sustain Its Recent Momentum?

By Harsh Chauhan – Updated Aug 11, 2020 at 1:24PM

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The rollout of 5G and data center upgrades are catalysts for this chipmaker.

The novel coronavirus pandemic is turning out to be a tailwind for Xilinx (XLNX), giving the chipmaker's business a nice shot in the arm, as evident in its latest quarterly results.

Xilinx's first-quarter results for fiscal 2021 were better than estimates -- which was not surprising, as the company had recently increased its guidance. But what stood out was the terrific growth in its data center business and a much-improved fiscal second-quarter outlook, indicating that Xilinx could be making a comeback after a difficult start to the year.

A man standing in front of a wall on which are drawn question marks

Image source: Getty Images.

Xilinx shows signs of life

Xilinx's top line dropped 14% year over year to $727 million during the quarter. Strength in the data center business helped Xilinx easily surpass its original estimate, which called for revenue between $660 million and $720 million.

Xilinx's data center revenue jumped an impressive 104% from the prior-year period thanks to stronger demand from cloud service providers for its artificial intelligence (AI) compute solutions. The segment also benefited from the acquisition of Solarflare that Xilinx completed in August last year. As a result of these tailwinds, Xilinx's data center business supplied 12% of the total revenue, compared to just 5% in the prior-year period.

The company's outlook also turned out to be better than anticipated. Xilinx was originally expecting its fiscal second-quarter revenue to be in line with the previous quarter. But now it estimates second-quarter revenue in the range of $730 million to $780 million, an increase of around 4% over the previous quarter at the midpoint.

Revenue would be down 9% on a year-over-year basis assuming Xilinx hits the midpoint of its estimate, which would be a nice improvement over the double-digit decline the company witnessed last quarter. This indicates that Xilinx may be turning around. 

Xilinx management says that the company is witnessing an uptick in its biggest business segment -- industrial, aerospace and defense, and test and measurement -- which accounted for 45% of revenue last quarter. The segment's revenue was down just 2% from the prior-year period, but a potential recovery could be in the cards. Xilinx management said during the latest earnings conference call that it is expecting a "strong recovery in our core markets led by TME [test, measurement & emulation] and A&D [aerospace & defense] as well as in auto and broadcast markets."

Meanwhile, Xilinx's wired and wireless business, which supplied nearly a third of the total revenue last quarter, also showed some improvements. Though the segment's revenue was down 33% over the prior year, it jumped 27% sequentially as demand increased on account of 5G network buildouts. That momentum could continue, as it says one of its Tier 1 customers in North America is expected to ramp up the deployment of 5G radio applications.

As such, Xilinx may be able to sustain its recent turnaround and keep up the terrific rally that it has been enjoying of late.

XLNX Chart

XLNX data by YCharts

Is the stock a buy?

Xilinx shares have rocketed higher over the past five months, as evident from the chart above. But that run has made the stock expensive.

Xilinx's trailing price-to-earnings (P/E) ratio of 42 is substantially higher than the five-year average multiple of 29, as is its forward earnings multiple of 37. But the chipmaker's growth isn't strong enough to justify this rich valuation right now. Xilinx's recent rally could unravel if the company's recovery loses steam, making it a risky bet for value investors.

But for those with a higher appetite for risk, it may make sense to hold on to Xilinx, as it could benefit from lucrative trends such as 5G and data centers.

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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