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Will Xilinx Surprise or Shock This Earnings Season?

Harsh Chauhan, The Motley Fool

Xilinx (NASDAQ: XLNX) is coming off a solid first half of 2019. The chipmaker saw one major speed bump in the first six months of the year after investors were left unimpressed by what looked like a solid quarterly report nearly three months ago.

But Xilinx has managed to make a strong comeback thanks to a notable product launch, and investors will be hoping that the stock steps on the gas when the company delivers its fiscal 2020 first-quarter earnings report next week.

Bull and bear fighting.

Image source: Getty Images.

Addressing the elephant in the room

The U.S.-China trade war has cast a cloud of uncertainty over Xilinx of late. The company announced toward the end of May that it had stopped sales of chips to Huawei after the Department of Commerce issued a denial order against the Chinese corporation.

This could weigh on Xilinx's upcoming results, though the extent of the damage might not be alarming. Xilinx reportedly gets just 1.8% of its revenue from Huawei, according to Bloomberg estimates.

Investors should also note that, unlike some of its semiconductor peers, Xilinx hasn't cut its first-quarter outlook. So there's a good chance that the company's results will be in line with its guidance at the beginning of the fiscal year.

However, investors will be paying closer attention to Xilinx's outlook, as Huawei could have played a key role in driving the company's fifth-generation (5G) wireless business higher this year. This is because Huawei has reportedly won half of the 5G tenders issued by the country's largest telecom operator, China Mobile.

So Huawei could have been a crucial catalyst for Xilinx's top line this year. The chipmaker is expecting revenue between $3.45 billion and $3.6 billion for the full year, which is better than what analysts were originally forecasting. At the midpoint of that guidance, Xilinx's revenue stands to increase nearly 15% year over year.

The Huawei catalyst could prompt Xilinx to issue a better-than-expected outlook, boosting investor confidence. But if Xilinx's results or outlook don't sizzle, the stock could take a knock given its rapid rise in recent months and its lofty valuation. However, savvy investors should be looking to take advantage of such a situation thanks to the multiple catalysts Xilinx enjoys.

Built for long-term growth

Despite the short-term headwinds, Xilinx investors shouldn't take their eyes off the long-term opportunities the company has.

The company leads the field-programmable gate array (FPGA) market with over half of the market share in its pocket, and it looks all set to increase its lead in the space. Xilinx recently started shipping its Versal adaptive compute acceleration program (ACAP) chips based on the 7-nanometer lithography process.

Xilinx claims that Versal is capable of achieving "dramatic performance improvements of up to 20X over today's fastest FPGA implementations and over 100X over today's fastest CPU implementations -- for Data Center, wired network, 5G wireless, and automotive driver assist applications." As a result, this chip could witness solid demand because it can be applied across a host of applications, such as data centers and automotive -- two areas where the deployment of FPGAs is gathering pace.

Within the data center space, demand for the type of programmable chips that Xilinx sells is expected to increase at an annual rate of 67% over the next four years, as the market reaches $4.6 billion, according to IHS Markit.

Xilinx's FPGAs are in strong demand from the automotive sector as well. The segment grew in the double digits last year thanks to the company's partnerships with 16 automotive original equipment manufacturers that have been tapping the chipmaker for powering their advanced driver-assistance systems (ADAS).

The market for ADAS systems is expected to attain an annual growth rate of 19% through 2025. Xilinx will have a better opportunity to tap into this market with the Versal chip.

There's a chance that Xilinx issues a better-than-anticipated guidance thanks to the strength of its product development moves. But even if that doesn't happen next week and the stock takes a beating, it would be a good idea to focus on the long-term opportunities and add more shares of Xilinx.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Xilinx. The Motley Fool has a disclosure policy.