Why AMD's Planned Acquisition of Xilinx Is a Smart Move

The semiconductor industry can be tough for investors to get a handle on, especially in the era of chip shortages. However, it's worth keeping your eye on the upcoming tie-up between Xilinx (XLNX) and Advanced Micro Devices (AMD 0.69%).

In this episode of "Beat and Raise" recorded on Jan. 27, Fool contributors Jose Najarro and Brian Withers discuss why the merger looks like a good move as Xilinx will bring strength in aerospace and automotive chips to AMD.

Brian Withers: You're covering a company that I'm not super familiar with and I don't even know how to say the name.

Jose Najarro: Xilinx.

Brian Withers: Xilinx.

Jose Najarro: Yes.

Brian Withers: XLNX is the ticker.

Jose Najarro: All right. Let me share the screen. For those not familiar with Xilinx, they are in the semiconductor industry. They provide numerous chips for the aero and defense market, for the automobile market. They're mainly known for a product called the FPGA. Right now let's take a quick look at earnings. Quarter 3 revenue was about $1 billion and this was up 26 percent year-over-year, and this is actually record revenue for them. Earnings-per-share, GAAP earnings of a $1.19. For those not familiar, Xilinx is about to get acquired by AMD. Many Fools are probably familiar with that one, Advanced Micro Devices.

So they have no call or guidance due to the acquisition. But today we actually got some good news. I do own shares of AMD. I don't own Xilinx, but investors of Xilinx got good news that their acquisition was getting a little bit of push from Chinese regulators. It was supposed to close during December, quarter 4 of 2021 but regulators in China were taking their sweet time. Today they mentioned that they approved the regulations, things are going and the acquisition should close by the end of quarter 1. I do want to say Chinese regulators did give some form of conditions to approve this acquisition. I took a quick look at the request or the conditions. None of them seem insane. It was just that, if AMD is buying Xilinx, we still have to make sure that Xilinx becomes some form of neutral party you can't force AMD products within your Xilinx products. I think the conditions were fair so I do believe the acquisition will close soon.

They do mention that they're seeing strong growth in the data center market, Xilinx is in the data center, and in the aero and defense market. I do believe those are two of my favorite industries. I invest a lot in data center groups and I have prior experience working in the aero and defense market, and that's a market I see numerous, numerous of dollars, millions and millions of dollars being spent on a yearly basis. So for me, I'm impressed to see that strong growth there. They also have strong quarter 3 free cash flow of 351 million so that's 35 percent of total revenue. I think that's pretty impressive for a form of a hardware company to some extent. This is also the fifth consecutive quarter of double-digit year-over-year growth. I believe AMD investors are watching this a little bit closer because after this quarter, hopefully, all these numbers and these are all positive results are going to go onto AMD. The biggest concerns, pretty much dealing the overall semiconductor industry is supply constraints. These companies are working almost at full capacity to some extent, so there's no room, there's no leeway for them. If there's a misstep, I do believe it could cause stock prices to really plummet, to go down more than they had already because they just have no room for mistakes. At the moment, Xilinx doesn't seem like they've made any mistakes. AMD has also been pretty good to investors. But all that could change pretty quickly.

Brian Withers: It's pretty solid financial results, a billion in revenue. This company is not small-fry by any imagination and that free cash flow number was just enviable. For those folks, for those members out there who own this company and are looking toward the AMD acquisition, should they just hold their shares? What's your perspective on this one?

Jose Najarro: For me, I would say if you want to get into that AMD market, it's better to hold those shares because you're going to get AMD shares, Xilinx investors will get AMD shares. If you don't want to be part of that AMD group, it might be better to sell-off. The prices have already leveled off to some extent. But personally, I am an investor of AMD and as a AMD investor, I am happy that Xilinx is entering the equation because it's going to provide AMD with new solutions in the aero and defense market, in the automotive market that we're seeing pretty strong right now as companies are really focusing on smart cars and EV cars. I'm happy as a AMD investor, as a Xilinx, it depends if you want to get tied up with AMD, which I believe it's a great move too.