5G and Data Center Stock Xilinx Continues to Rebound on Improving Sales

The last couple of years have not been easy for Xilinx (XLNX). A normal cyclical slump in semiconductor sales was exacerbated by ongoing effects from the trade war between the U.S. and China (yup, that's still happening). But with sales to China's tech giant Huawei mostly removed from the picture now, strength in 5G and data center demand is helping this chip company make a comeback.

Addressing the irrelevant elephant in the room

First, let's address the rumors that recently surfaced that scrappy chip designer AMD (AMD 0.69%) was in talks to acquire Xilinx. Shares of our primary subject increased by a double-digit percentage on the speculation ahead of the latest quarterly report. But in keeping with confidentiality rules, Xilinx management didn't discuss or field any questions on possible negotiations with AMD. Besides, a note from analysts at Citigroup states Xilinx isn't interested in selling out.  

Image source: Getty Images.

While getting hold of Xilinx would most certainly benefit AMD, I for one would be fine with Xilinx saying, "No thanks." The company is still rebounding from the effects of the trade war, so agreeing to be acquired now wouldn't exactly fetch the highest of price tags. Plus, while the competition is intense in the burgeoning 5G equipment and high-end computing data center markets, Xilinx is more than holding its own. 

During second-quarter fiscal 2021 (the three months ended Sept. 26, 2020), Xilinx's revenue fell 8% year over year to $767 million (due to the aforementioned trade war) but increased 5% from the previous quarter. And management's outlook for third-quarter fiscal 2021 is calling for a 4% to 11% increase from a year ago, to $750 million to $800 million in revenue. After a rough year-and-a-half wait, Xilinx is back in growth mode.

5G and data centers are where it's at

Helping lead the charge higher was a big rebound in automotive industry and broadcasting industry demand -- two of the more beat-down areas of the economy from earlier in the year. Xilinx's data center segment also notched a 30% year-over-year increase in Q2 and exceeded $100 million in sales for the first time. Cloud computing and AI needs from certain customers were responsible for the big jump. The aerospace, defense, and industrial segment continues to chug higher and the wired and wireless segment is down.

QOQ= Quarter-over-quarter. YOY= Year-over-year. Data source: Xilinx.  

What's up with the wired and wireless segment's decline? That's the segment that houses 5G mobile network sales, and with 5G network coverage rolling out with gusto this year, it might be surprising to see Xilinx's hardware sales headed south in this area. Not to worry, though. Bear in mind that 5G is still very early on in deployment. According to Xilinx CEO Victor Peng, network providers are still working through first-gen 5G hardware inventory. As that inventory is sold and put to use in the field, there will be an eventual rebound in the wireless and wired segment when second-gen 5G equipment starts to sell later this year and next.

Third-gen equipment is also in the works, and the technology roadmap will extend far beyond that in the years ahead. While the new network is a sprint among the wireless providers vying for consumer attention, this is more of an endurance race behind the scenes for the hardware providers.  

Paired with trade war effects being lapped, what this means is that Xilinx is now back in year-over-year growth mode. Sales are coming out of a trough, and even close to a cyclical low, this remains a highly profitable chip company. Free cash flow (revenue less cash operating and capital expenses) of $232 million in Q2 represents a 30% free cash flow profit margin, and it was a 22% increase over a year ago in spite of overall revenue falling 8%. An AMD acquisition may or may not be in the works, but it doesn't matter. I'm bullish on this 5G and data center stock either way.