XILINX IS A LEADER IN PLD CHIPS USED IN 5G BASE STATIONS
UPDATE: XLNX has been added to the Sell list on 7/30/2021 at the market closing price of $149.84 for a return of 48.40%.
This month’s stock pick is a company called Xilinx (NASDAQ:XLNX). They makes computer chips called programmable logic devices (PLDs). Their PLDs are used in several mainstream applications, including Data Centers, Industrial, Aerospace & Defense, Automotive, and one of my favorite investment areas – 5G Base Stations.
I first learned of Xilinx many years ago back in my college days as a computer engineering student. I actually programmed these devices in one of my classes. Back then we used Altera – now owned by Intel (NASDAQ:INTC) and Xilinx. I don’t remember all the details from my college days, but one thing I do remember was that the Xilinx chips seemed to be easier to program and work with than Altera. I remember spending many grueling hours programming my Altera only to have it not work and topping that off with multiple caffeine-infused all-nighters troubleshooting it.
Compare that with my Xilinx chip, which worked the way I wanted it to the first time I programmed it in less than an hour. Suffice it to say I am biased towards Xilinx chips over Altera.
As of 2016, Xilinx was #1 in PLDs with 51% market share and Intel was #2 with 37%. They basically have a duopoly on the PLD market. Source: Xilinx Investor Relations
XILINX SAW A HUGE REVENUE BOOST IN Q2 DUE TO 5G
Although Xilinx’s PLDs penetrate many different markets and applications, the one I’m most excited about is 5G base stations. For those of you who don’t know, 5G is the next evolution in wireless internet after 4G LTE. 5G speeds are expected to be 20x faster than 4G LTE and even faster than wired cable internet!
In Xilinx’s Communications group – which is in charge of their 5G chips – revenues shot up 34% from 2018 to 2019. According to their 10k, “The increase was primarily due to higher sales from all sub-segments, with particular strength coming from Wireless business driven by both the continued deployment of 4G Long Term Evolution (LTE) networks and the accelerated global deployment ramp of 5G wireless networks.”
It’s also possible that countries are loading up on Xilinx chips in fear of President Trump’s potential U.S. tariffs. If this were the case, we may see a steep dropoff the following year. Nevertheless, it’s nice to see such high demand for their products. Compare that to NVIDIA’s Q2 revenues which shrank by 17.4% or Intel’s, which fell by 2.7% year-over-year.
WE’RE IN THE EARLY INNINGS OF A U.S.-CHINA FACEOFF FOR 5G
The U.S. is in a race with China and other countries to deploy 5G on a mass scale. According to this CNN article, 5G is the platform for tomorrow’s economy. According to this the Washington Post, By 2022, fifth-generation cellular networks will power as many as 9 percent of mobile data connections across North America. We are still in the very early innings of 5G, which leaves a lot of opportunity for growth and profits for Xilinx.
Chip stocks are cyclical, and there could be a chance that we’re at or near the top of the chip stocks cycle. The last time that happened was the Dot-com Bubble in 2000. Xilinx stock peaked at $98.31 in June 2000, got pummelled to $13.50 in October 2002, and took 16 years to make a new high. This kind of volatility is not for the faint of heart.
I’m going to pay attention to the revenue and earnings growth on each 10-Q and 10-K statement for any major signs of a decline in the business. I may consider selling if there is a major slowdown.
The chart action is not looking too good for Xilinx. If this turns out to be like another 2000 cyclical top, then the stock can get clobbered. The MACD is also falling, so there’s no reason to see why the stock should turn around here.
However, what it has going for it is that it’s sitting at a short-term support level. Another way to look at it is that it broke out of a 19-year saucer base, pulled back to support, and is getting ready to blast off from here.
Based on conflicting chart patterns, I don’t put a lot of weight into the chart.
That being said, I’m still willing to buy Xilinx based purely on the fundamental thesis that it will be a major player as 5G rolls out in the coming decade. However, I will be cautiously dipping my toe in.
Stats (as of 8/23/2019)
- Market Cap: $25.5B
- Closing Price: $100.97
- Revenue Q2: $849.6 mil
- Revenue Growth (Q2 yoy): 24.1%
- Net Income Q2: $241.5 mil
- Net Income Growth (Q2 yoy): 27.1%
- EPS: $0.95
- EPS Growth: 26.6%
- Debt/Equity: 47.4%
Should I Buy?
Xilinx could be a good addition to a portfolio that needs exposure to:
- The Technology Sector
- 5G stocks
Be sure to do your own research and determine for yourself if Xilinx is a good stock for your portfolio.
How Much Should I Buy?
Here are some portfolio guidelines we Wolves try to live by:
- Thou shalt not hold more than 35% in any one particular sector
- Thou shalt not invest more than 10% of principal into 1 individual stock
- Thou shalt make small purchases. The general rule of thumb is to spend no more than 2% of your portfolio on a single purchase and build up your position over time.
The Bottom Line
Xilinx is a market leader in PLDs and has a duopoly with Intel in these kinds of chips. Their chips are used in many business applications, but the biggest catalyst could be 5G.
Chip stocks are cyclical and we could be at the top of a cycle. This could cause Xilinx stock to crater, as it did in 2000 when it took 19 years for the stock price to recover. So as with any stock, tread carefully.
I/we own shares of stock in XLNX.
Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies discussed in this article.
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Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.
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