We are lowering our near-term rating on the XLNX shares of Xilinx Inc. (NGS: XLNX) to HOLD from BUY. In October 2020, Xilinx agreed to be acquired by AMD. In the wake of that announcement, XLNX has pushed past our prior 12-month target price. Given the all-stock nature of the deal, XLNX is no longer trading on fundamentals and its stock price is instead levered to the AMD stock price. Pursuant to the agreement, Xilinx has suspended its dividend, further reducing its return potential.
After multiple challenging quarters, XLNX delivered toward positive top- and bottom-line comps in the quarter for the first time since 2Q20. Fiscal 3Q21 revenue rose by 11% annually, while non-GAAP EPS was up 16%. The defining event for Xilinx since it last reported its quarterly results on 10/21/20 was its agreement a few days later to be acquired by Advanced Micro Devices (AMD: BUY). We believe the deal makes sense for both parties.
For Xilinx, the deal provides a safe landing spot in a semiconductor market in which consolidation is creating industry giants. In such an environment, the costs of remaining technologically relevant risk outstripping the capabilities of smaller and even mid-sized players. We do not anticipate another suitor bidding for Xilinx, and with an all-stock deal we see little potential for the purchase price to be negotiated higher. Applied Materials raised its purchase price for Kokusai Electric Corp. to $3.5 billion, from an initial $2.2 billion; but that was a cash deal. In the potentially year-long period until deal closure, we see limited downside risk for XLNX, given its unique market positioning with clients and given relatively few direct rivals in the PLD and FPGA space. At the same time, the stock has moved through our target price, and we are loath to raise the target price on a non-fundamental basis. We are reiterating our long-term BUY rating while lowering XLNX to HOLD for the intermediate-term.
RECENT DEVELOPMENT
Non-GAAP EPS easily topped the Wall Street consensus estimate of $0.68 per diluted share.
In its fiscal 3Q21 results release, Xilinx acknowledged the 10/27/20 agreement whereby it would be acquired by Advanced Micro Devices. Core Product revenue (28% of total) grew 4% year-over-year while backing down 2% on a quarter-over-quarter basis.
The AIT business includes core non-technology markets of Aerospace-defense and industrial, along with Technology, Media, and Entertainment (TME). Non-technology industrial end markets continue to recover from shut-downs in calendar 1H20. Xilinx has called Aerospace-Defense a ‘secular driver’ within its core business. Automotive, Broadcast, & Consumer (ABC, 19% of revenue) rose 13% year-over-year and 26% on a sequential basis. As noted by other semiconductor makers exposed to automotive, automotive continues to show signs of recovery while continuing to run below pre-pandemic levels. Data Center Group (DCG, 7% of revenue) declined 18% annually and fell by 47% sequentially in 3Q21. Note that DCG posted exceptional growth of 30% annually and 23% sequentially in 2Q21. Growth in recent quarters has been driven by broad deployment of Alveo-based compute AI clusters and Solarflare NIC adaptors. The Wired & Wireless Group (WWG, 29% of revenue) grew 2% annually and 14% sequentially in 3Q21. In recent quarters, WWG has performed below pre-pandemic levels but has recently seen significant revenue contribution from tier 1 OEM customers ramping RFSoC (radio frequency on a chip) applications amid the 5G global rollout.
For Xilinx, the deal provides a safe landing spot in a semiconductor market in which consolidation is creating industry giants. In such an environment, the costs of remaining technologically relevant risk outstripping the capabilities of smaller and even mid-sized players. We do not anticipate another suitor bidding for Xilinx, and with an all-stock deal we see little potential for the purchase price to be negotiated higher. Applied Materials raised its purchase price for Kokusai Electric Corp. to $3.5 billion, from an initial $2.2 billion; but that was a cash deal. In the potentially year-long period until deal closure, we see limited downside risk for XLNX, given its unique market positioning with clients and given relatively few direct rivals in the PLD and FPGA space. At the same time, the stock has moved through our target price, and we are loath to raise the target price on a non-fundamental basis. Should the deal not go through for whatever reason, the company’s strong long-term growth prospects relative to peers signal continued value in the stock, justifying our HOLD rating. We are reiterating our long-term BUY rating while lowering XLNX to HOLD for the intermediate-term.
EARNINGS & GROWTH ANALYSIS
Revenue was above the high end of management’s $750-$800 million guidance range and well ahead of the $776 million consensus estimate. Xilinx has historically provided directional line-item guidance rather than explicit EPS guidance.
Non-GAAP EPS of $0.78 for 3Q21 advanced 16% year-over-year while easing by $0.04 from non-GAAP EPS of $0.82 for 2Q21. Non-GAAP EPS easily topped the Wall Street consensus estimate of $0.68 per diluted share.
Due to its pending acquisition, Xilinx is no longer holding post-earnings conference calls or providing any financial guidance for future periods. We will continue to maintain coverage and financial modeling on XLNX until the AMD deal is either consummated or called off.
FINANCIAL STRENGTH & DIVIDEND
Pursuant to terms of its merger with AMD, Xilinx has agreed to stop paying quarterly dividends and repurchasing its stock. We have suspended our dividend estimates for Xilinx pending consummation or cancelation of the AMD deal.
MANAGEMENT & RISKS
The newest risk for Xilinx is that recent appreciation in the stock price risks being wiped out should the AMD transaction fail to go forward for any reason. Given that XLNX is no longer trading on fundamentals, we have lowered our rating on XLNX to HOLD.
COMPANY DESCRIPTION
In October 2020, Xilinx agreed to be acquired by Advanced Micro Devices.
VALUATION
Peer-derived value is around $80, also below current prices.
Given the all-stock nature of the deal, XLNX is no longer trading on fundamentals and its stock price is instead levered to the AMD stock price. We have therefore lowered our intermediate-term rating on the XLNX share to HOLD from BUY.
