3 Reasons Xilinx Is Built for Growth

Xilinx's (NASDAQ: XLNX) second-quarter results turned out to be a mixed bag, but this hasn't dented investors' confidence in the stock given the chipmaker's bright long-term prospects. The company missed Wall Street's top-line expectations by a whisker, reporting $620 million in revenue as compared to $579 million in the year-ago quarter.

However, Xilinx beat the bottom-line forecast by a couple of cents as its earnings jumped from $0.61 per share last year to $0.65 per share during the second quarter. Throw in strong quarterly guidance that calls for $630 million in revenue at the midpoint as compared to Wall Street's $626 million expectation and it isn't surprising to see why Xilinx stock has continued its upward trajectory after the quarterly report was released on Oct. 25.

But there's more to the company than just the quarterly numbers and short-term guidance. The company has been setting itself up for long-term growth by targeting the fast-growing FPGA (field-programmable gate array) chip market. A closer look at some of the key trends highlighted by Xilinx management on the latest earnings call tells us that it is moving in the right direction.

Advanced products are gaining momentum

Xilinx's revenue from sales of its advanced products (UltraScale+, Ultrascale, and 7-series products) shot up 21% year over year during the second quarter. These products now supply 52% of the top line as compared to 46% in the prior-year period, which isn't surprising as the chipmaker is targeting lucrative end markets such as advanced driver assistance systems (ADAS).

Xilinx's Zynq programmable chip has been the star of this segment. Sales of this platform shot up 65% year over year, and it now accounts for 12% of the company's total sales. More importantly, the Zynq chip platform shouldn't lose momentum anytime soon thanks to the growing adoption of FPGAs in the automotive space.

FPGAs are programmable chips that can be optimized to perform several tasks after they have been manufactured. The flexible architecture of FPGAs means that developers can train the chip to perform tasks that cannot be otherwise executed by a central processing unit (CPU) or a graphics processing unit (GPU), as they are constrained by their fixed architecture.

As a result, automakers and component suppliers are increasingly turning toward FPGAs, as these chips reduce the cost of electronic components in a vehicle. The growing adoption of FPGAs by the automotive industry has been a boon for Xilinx so far. The company claims to be the second-ranked chip supplier for the ADAS space, having shipped more than 40 million chips for this market.

In fact, Xilinx's ADAS sales have grown at a 60% annual rate since fiscal year 2013, and investors can expect the trend to continue given the strong client base it has built over the years. The company's FPGAs are currently being used by 26 auto brands and 96 car models.

Such strong presence in the ADAS market bodes well for Xilinx. JPMorgan forecasts that ADAS-related chip content in cars will increase by $300-$400 through 2025. This isn't surprising as shipments of ADAS-related components are expected to jump from just 218 million units last year to 1.2 billion units in 2025.

Therefore, Xilinx's advanced products revenue should keep increasing thanks to the secular growth of ADAS chips and the company's strong customer relationships in this space.

Cloud is down, but not out

Xilinx's revenue from the communications and data center market dropped 5% year over year in the latest quarter. This weighed on the company's top line as the segment supplies 37% of the total revenue, but investors shouldn't panic just yet as recent deals struck by the chipmaker could boost growth.

Last quarter, Xilinx landed three big cloud computing clients -- Amazon Web Services (AWS), Huawei, and Alibaba. All these cloud computing players have decided to use Xilinx's FPGAs to accelerate their infrastructure, a trend that has recently gathered momentum based on the benefits of these programmable chips.

The programmable nature of the FPGAs speeds up the training process of artificial intelligence models in the cloud. Moreover, FPGAs are cost-effective because they deliver a stronger performance for each watt of energy consumed, making them ideal for deployment in a large-scale server setting where power consumption needs to be minimized.

As a result, FPGA deployment in data centers and cloud computing infrastructure is set to increase through 2025. These chips are going to play a key role in powering deep learning applications in the cloud, according to Tractica's estimates, with their shipments expected to eventually match CPUs by then.

Xilinx dominates FPGAs

The use of FPGAs across fast-growing areas such as automotive and the cloud will boost the market's revenue to $12.1 billion by 2024, up from $6.9 billion last year, as per Variant Market Research. Xilinx is in pole position to tap this growth as it controlled 59% of this market at the end of fiscal year 2017.

What's more, Xilinx believes that it has the potential to increase its market share to 60%-65% over the next four years, which seems achievable given the technology lead that it enjoys over archrival Intel. According to Xilinx, it has an 18-month lead over Intel in the FPGA arena. More importantly, the company plans to maintain this lead as it is working ambitiously to launch its 7-nanometer technology node next year.

By comparison, Intel recently announced plans to develop its next-generation FPGAs on the 10-nm technology node, though it didn't provide details about a specific launch date. Therefore, Xilinx's next-generation FPGA chips will be based on a smaller technology node, which means that they should ideally consume less power, reduce manufacturing costs, and deliver an improved performance.

Therefore, it isn't surprising to see why analysts expect Xilinx's annual earnings growth rate to more than double over the next five years, up from the 4% annual jump that it has delivered in the last five. Investors should be interested in the long-term upside Xilinx could enjoy from its leadership position in the FPGA market.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.