Xilinx (NASDAQ:XLNX) has lost more than 10% in the last three months as a result of weak fourth-quarter results. The company, which supplies chips to networking giant Cisco Systems (NASDAQ:CSCO), is also in a position to benefit from China Mobile's (NYSE:CHL) LTE rollout. But it is having a tough time due to weakness in defense and aerospace. However, investors shouldn't be discouraged by just one quarter of weak performance, as Xilinx's prospects for the long run appear bright. Let's see why.
LTE rollout is a big opportunity
Xilinx's new products are in strong demand. The company's products based on the 28-nanometer platform such as Kintex-7, Virtex-7, Zynq-7000, and Artix-7 are seeing solid sales momentum. Driven by these products, Xilinx's 28-nm products registered terrific sequential growth of 40% in the fourth quarter. Strong wireless activity in China was the key reason behind this impressive jump.
Since China Mobile is aggressively rolling out LTE in China, Xilinx can expect the sales of these products to gain momentum. The telecom company is setting up the world's largest 4G network, and its spending on this initiative is expected to exceed $13 billion by the end of 2014. China Mobile is expanding its LTE network by building 500,000 base stations to cover 350 cities by the end of the year. Moreover, China Mobile is expected to float a second tender this year to construct the required infrastructure. These developments bode well for Xilinx going forward.
Xilinx expects its business to improve further with LTE deployments in various regions such as North America, Asia Pacific, Europe, and Japan. These developments can push up sales in its wired and wireless businesses in the ongoing fiscal year. To tap this market, Xilinx has launched various metro, access, and data-center applications, especially the Virtix-7 design ramps that have started picking up pace.
Apart from the LTE deployments, Xilinx also sees great opportunity in infrastructure upgrades to 100G and 400G products. The company believes that the rising bandwidth requirement will drive its sales going forward.
Cisco: Another catalyst
Demand for bandwidth will also increase as a result of Cisco's Internet of Things, or IoT. By 2021, Cisco believes that the IoT will be worth $19 trillion. As more devices come online, Cisco will be able to sell more networking equipment along with software and services. Moreover, Cisco recently announced that it is planning to acquire ThreatGrid, a malware and threat-intelligence company, to make the Internet of Things secure.
Xilinx has a strong relationship with Cisco, as it was awarded the 2013 Supply Chain Security Champion Award by the networking company. So, as Cisco tightens up security for the IoT, demand for Xilinx's chips will improve.
Product development is driving market share gains
Xilinx's new products have enabled it to gain market share. With its 28-nanometer product, the company has captured 70% market share in programmable logic devices for the third consecutive year. Further, Xilinx expects to sell $700 million worth of 28-nanometer products in fiscal 2015.
Xilinx is looking to take its product development to new highs. It will start shipping the functional sample of Kintex UltraScale, the industry's first 20-nanometer design, in November this year. The company has incorporated customer feedback for this platform and is trying to bring this product to the market six months ahead of competitors.
Xilinx shares have lost momentum in the last three months, but the company is looking well-placed to profit from two big opportunities. The rollout of LTE in China, and across the world, along with Cisco's IoT will propel Xilinx's financials higher in the future. This is a good reason why investors would do well to take advantage of Xilinx's weak performance in the last three months to buy more shares.
Amal Singh has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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