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Will Xilinx Survive the U.S.-China Trade War?

Nicholas Rossolillo, The Motley Fool

Shares of Xilinx (NASDAQ: XLNX) lost nearly a third of their value in the weeks after the company's fiscal 2019 fourth-quarter report. Investors reacted poorly to the numbers (they were good numbers), and an escalating trade war between Washington, D.C., and Beijing hasn't helped. 

However, Xilinx and its portfolio of field programmable semiconductors are still growing fast, and the trend doesn't look to be slowing down much with artificial intelligence-powered data centers, edge computing, and mobile 5G networks picking up steam. Trade war or not, this chipmaker should be just fine.

The fiscal year in review

There was a lot to like in Xilinx's final quarter of its fiscal year. Revenue was up 30%, leading to a 34% rise in earnings adjusted for one-time items. It capped off a fantastic year for the company as multiple tailwinds in the auto industry, 5G, and data centers continued to fill its sails and propel business higher. Demand for Xilinx's specialized chips led to another year of exceptionally high gross margin -- especially for the semiconductor industry -- on product sold.

Metric

12 Months Ended March 30, 2019

12 Months Ended March 31, 2018

Year-Over-Year Increase (Decrease)

Revenue

$3.06 billion

$2.47 billion

24%

Gross profit margin

68.8%

69.9%

(1.1 p.p.)

Operating expenses

$1.15 billion

$1.04 billion

11%

Adjusted earnings per share

$3.48

$2.64

32%

P.p. = percentage point. Data source: Xilinx.

As operations grew, expenses were kept in check. The biggest reason for the 11% increase in operating expenses was research and development, which was up 16% to $743 million. With Xilinx selling to new and emerging markets, though, that is to be expected as the company continues to make advances in its technology to stay ahead of the pack. Either way, high profit margins and slow growth in expenses led to even faster growth on the bottom line.

At the time of the report, management was feeling pretty confident that another good year was in the cards. Revenue in the first quarter of the new fiscal year is expected to be up 24% at the midpoint, and adjusted earnings using management's guidance should yield around a 30% annual increase. Additionally, it was also announced that private outfit Solarflare is being acquired to advance Xilinx's field programmable chips and related tech. That deal should close sometime in the second quarter.

A cloud surrounded by a bank of computers, illustrating a data center.

Image source: Getty Images.

How bad will the China crackdown hurt?

As good as the numbers were, all of the forecasts Xilinx gave were prior to notable developments in the trade war. The U.S. and China exchanged a couple of tariff hikes on each other, and the White House also issued an executive order restricting American companies from doing business with Chinese tech giant Huawei. Temporary exemptions are being granted for some businesses that sell to Huawei, but the political drama could nonetheless dent Xilinx.

That's significant for two reasons: Huawei is a communications juggernaut, and over a third of Xilinx's revenue came from the communications industry. Moreover, the Asia-Pacific region was where nearly half of the company's revenue was derived last year. Circumventing both Huawei and tariffs could present a challenge, to say the least.

No matter how the economic back-and-forth plays out, Xilinx should be OK. It says its serviceable market is expected to grow 16% a year through 2024, increasing from about $15 billion now to $28 billion. Data centers and wireless networks should lead the way higher, but the auto industry and industrial usage of chips could grow in the high single digits, too. Tariffs and a ban on a single company won't completely contain that market explosion.

Thus, Xilinx could continue to grow via an expanding marketplace for its solutions, and has the potential to sop up more market share along the way. The stock is priced for fast expansion; trailing-12-month price to free cash flow is 26.8, and one-year forward earnings per share is 22.7. Nevertheless, if the company continues to deliver double-digit top- and bottom-line results, that isn't an outrageous price to pay.

The only caveat is the trade war. Expect more volatility ahead until a resolution is (eventually, hopefully) sorted out. For investors who don't mind the tumult, though, go ahead and pull the buy trigger on Xilinx stock.

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Nicholas Rossolillo and his clients ha no position in any of the stocks mentioned. The Motley Fool recommends Xilinx. The Motley Fool has a disclosure policy.