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Morningstar | Xilinx Continues to Ride 5G Early Deployment Wave With Strong Q4; but Shares Overvalued

Narrow-moat Xilinx reported strong fourth-quarter results primarily due to the communications segment because early 5G deployments in South Korea and other countries have bolstered the firm’s sales in radio and baseband applications. Compared with the prior 4G ramp, the firm has greater content in radios, basebands, and RF systems on a chip. CEO Victor Peng reiterated that the firm is capturing more than its typical share in baseband, with custom chips likely to replace Xilinx’s FPGAs in time. We maintain our $80 fair value estimate because we believe the latest tailwinds in wired and wireless may subside, particularly because 5G spending is likely to be erratic. Shares continue to look expensive in our view, despite the 9% decline during after-hours trading.

Fourth-quarter revenue rose 30% year-over-year and 4% sequentially to $828 million. Communications grew 23% owing to wireless strength, related to 5G. Industrial, aerospace, and defense rose 2% while the remaining end markets fell. Automotive, broadcast, and consumer declined 6%, as weaker broadcast was partially offset by better-than-expected automotive demand for ADAS solutions. Data center and test, measurement, and emulation fell 12%, because of a pause in spending by a major data center customer, although Peng was confident of a rebound in the next quarter. Gross margins were 67.5%, down 150 basis points from the prior quarter because a higher proportion of wireless (which is margin dilutive). For fiscal 2019, revenue of $3.1 billion grew 24% (relative to restated fiscal 2018 results related to ASC 606), which is the first time Xilinx generated over $3 billion in sales.

Management expects first-quarter revenue to be at a midpoint of $850 million, which implies sequential growth of 3%. Gross margins are expected to be down another 150 basis points to 66% due to the continued strength in wireless.

Despite this latest duration of double-digit year-over-year growth we question the sustainability, given Xilinx’s broad end-market exposure that has historically ebbed and flowed in an uncorrelated manner. Further, we are intrigued by Intel’s 10-nanometer Agilex FPGA family relative to Xilinx’s adaptive compute acceleration platform and expect greater competition for Xilinx’s advanced products through 2019 and beyond. We look forward to getting more information about Xilinx and Intel’s FPGA strategies at their upcoming investor days on May 14 and May 8, respectively.