Xilinx Inc. (NASDAQ:XLNX) will host its annual analyst meeting on Monday, May 22. MKM Markets expects the message to remain on end-market diversification and emerging opportunities in growth areas such as data center/cloud computing, industrial IoT and longer-term prospects in 5G wireless infrastructure. Xilinx is also likely to amplify its AI/Machine Learning message given increasing investments in these areas. From a model perspective, the firm expects Xilinx to maintain a consistent top line growth target to FY 2017 of 4-8% and a longer-term operating margin target of 30%+. Despite strong management execution and positive traction in emerging growth markets, MKM Marketscontinues to believe that risk-to-reward is fairly balanced for XLNX shares given current valuation.
Communications and Data Center revenue represented 42% of Xilinx revenue in fiscal 2017 (Mar.), an increase of 9%, in dollars, versus fiscal 2016. Xilinx noted that the increase was primarily due to higher sales in wireless infrastructure markets coupled with more modest increases in wireline and data center end markets. Industrial, Aerospace & Defense end markets represented 41% of revenue, up 5% versus fiscal 2016 and Broadcast, Consumer & Automotive markets accounted for the remaining 17% of revenue, up 2% from fiscal 2016. The firm expects Xilinx’s key message at its analyst meeting to remain on end-market diversification and TAM expansion opportunities over the next several years as the company continues to increase investments in growth areas outside of its traditional end markets.
Xilinx announced the general availability of its Virtex UltraScale+ FPGAs in Amazon’s (AMZN, Buy, $958.49, $1,095 PT – covered by Rob Sanderson) EC2 F1 compute instances in April. This program is novel in that it gives developers access to hardware acceleration without many of the upfront costs and development efforts required to initially set up an FPGA based prototyping system. MKM Markets understands that initial response has been positive across multiple end markets but it wonders if this will be another example of FPGA use in the early stages of development only to be replaced by custom solutions once designs are hardened.
At the 2016 analyst meeting, Xilinx spent a fair amount of time on its efforts to enable embedded vision across various markets and highlighted the potential for a $4 billion SAM by 2021. Earlier this week, Xilinx announced an investment in DeePhi Tech, a company focused on machine learning. MKM Marketsbelieves Xilinx’s recent efforts in the area imply expectations for a larger longer-term SAM in AI/machine learning variants.
The firm expects Xilinx to maintain a consistent top line growth target to FY 2017 of 4-8% and a longer-term operating margin target of 30%+, both of which would be consistent with current consensus estimates. Xilinx shares trade at 24x the current fiscal 2019 consensus estimate (GAAP) and 20x the non GAAP consensus estimate versus the peer group average of 18x. MKM Markets believes that risk-to-reward remains fairly balanced here.