Xilinx (NASDAQ:XLNX) was flying high on the 5G (fifth-generation) wireless wave a year ago as the rollout of 5G networks in markets like South Korea and China gave Xilinx’s top and bottom lines a nice shot in the arm.
But it didn’t take long for Xilinx to turn from a top growth stock into a laggard. The U.S.-China trade war knocked the wind out of the chipmaker’s sails, and now, a perceived slowdown in 5G investments is heaping more misery on the company.
Investors react as 5G catalyst slows
Xilinx’s latest quarterly report sent the stock down 10%. The company’s revenue fell 10% year over year while net income fell 28%. In its press release, the chipmaker blamed “global trade headwinds” and “a slowdown in both 5G and wired infrastructure deployments” for its tepid performance. Xilinx will slash 7% of its workforce and also keep a check on discretionary expenses as it tries to minimize the impact of the headwinds it is currently facing. The bad news for Xilinx investors is that the bad times look like they are here to stay, at least for the short term, as telecom operators seem to be taking a breather before the next round of 5G infrastructure deployments.
“The additional negative impact to our wireless business is result of a slowdown in 5G rollout across multiple regions as many operators take a pause before the next wave of infrastructure deployment,” said CEO Victor Peng on the latest earnings conference call.
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Xilinx was already suffering from the ban imposed on doing business with Huawei, and now, the weakness in demand across its wired and wireless customers is weighing on the company’s financial performance.
Xilinx expects revenue in its wired and wireless group — which supplied 31% of total revenue last quarter — to decline in fiscal 2020. Revenue from this segment was down 18% year over year during the quarter. That’s in stark comparison to the scenario just a year ago when Xilinx’s fiscal third-quarter revenue from the wired and wireless business had shot up 41% annually.
Now that Xilinx seems to have lost one of its major growth drivers, it is not surprising to see investors dumping the stock. Management is hopeful that the current downturn will only last until the next wave of 5G investments arrives. But will that really be the case?
Will there be a turnaround?
Peng believes that Xilinx’s 5G catalyst will make a comeback. In his closing remarks on the latest earnings conference call, he said:
It is important to remember we’re still in the relatively early innings on 5G and it started out much stronger and earlier than people predicted. Now we’re having a soft spot, but we’re engaged. We have the right kind of engagements with top OEMs and there’s still may more innings to come. So we remain bullish in terms of our overall long-term outlook in those growth drivers.
Last year, Gartner predicted that 5G infrastructure investments could nearly double in 2020 to $4.17 billion as more countries deploy the next-generation network. The year has just begun, so there is a possibility that 5G investments will gather pace as the year progresses. But Xilinx investors need to be cautious because the arrival of the next wave of 5G investments might not translate into financial gains for the company. That’s because Xilinx supplies programmable chips known as FPGAs (field-programmable gate arrays) that can be purchased off the shelf and allow telecom operators to quickly deploy networks for testing.
And FPGAs have their limitations as far as performance and power consumption are concerned. Samsung has reported there’s a move toward custom chips known as ASICs (application-specific integrated circuits) that are more suited for the purpose. A move to ASICs would dent demand for Xilinx’s FPGAs.