The semiconductor industry has been hit particularly hard by the U.S.-China trade war. With a significant amount of the manufacturing process headed up in the east, but headquarters mostly based in the California Bay Area, chipmakers have been hit with a volley of body blows: cross-border tariffs, a Chinese economic slowdown, and a White House crackdown on Chinese telecom equipment manufacturers ZTE in 2018 and Huawei in 2019.
Despite the significant disruption, Xilinx (NASDAQ: XLNX) has continued to shine. The programmable chipmaker is benefiting from multiple secular tailwinds blowing strong at its back and helping it plow through the treacherous waters of international trade. After the company's fiscal 2020 first-quarter report (the three months ended June 29, 2019), the stock still looks like a best-in-show pick.
Same story, different day
Granted, Xilinx's last quarterly performance wasn't perfect. Sales to Huawei were suspended during the middle of the quarter to comply with the trade ban, and a digital memory customer started going through a product transition. That slowed down the top-line rate of growth and put pressure on gross profit margin on product sold.
Three Months Ended June 29, 2019
Three Months Ended June 30, 2018
Gross profit margin
Adjusted earnings per share
YOY = year over year. Pp = percentage point. Data source: Xilinx.
At the end of the day, though, Xilinx has a lot going for it. Some shipments of older chips to Huawei resumed -- as they did for other American chip makers like Micron -- toward the end of the quarter, but Huawei simply isn't so important as to completely derail Xilinx. There are other wireless infrastructure providers out there as 5G mobile networks start to slowly roll out, and Xilinx's semiconductors are a key component for all of them. When adding in the company's other growth stories in the automotive space, data centers, and anywhere artificial intelligence can be applied, there is more than enough to keep the upward trajectory easily intact.
What to expect next
But what about the guidance for next quarter? Xilinx did call for revenue of $800 million to $850 million -- flat at best with Q1 and up just 7% to 14% year over year. Operating expenses are also expected to be up 16% year over year, which should keep downward pressure on earnings growth. Thus, this semiconductor manufacturer isn't completely immune to the trade war, and a resolution to the dispute and an ease-up on Huawei would certainly be welcome.
Shareholders can nevertheless take solace in the fact that, even in the face of geopolitical unrest, Xilinx can still muster better-than-par performance where so many others are reporting declines in business. That speaks to the company's technology, with its chips a key component in artificial intelligence and other advanced computing networks.
Still, it is worth noting that continued high-octane growth is priced in. The stock is valued at 27.6 times trailing 12-month free cash flow (what's left over after operating and capital expenditures are paid), and one-year forward price-to-earnings estimates also put shares at 27.6. Not exactly a value investor's dream.
However, Xilinx has demonstrated its ability to turn sales growth into even faster profit growth, and a share repurchase program (over $316 million worth of stock was bought last quarter alone) and a 1.2% annual dividend yield sweeten the deal. Trade war or not, this semiconductor stock is worth a serious look.