Processing platform creator Xilinx's (NASDAQ: XLNX) 5G momentum faded in 2020 as its programmable chips gave way to application-specific integrated circuits (ASICs) made specifically for deployment in next-generation base stations.
The possibility of Xilinx seeing a downturn in its 5G business was always there. Its field-programmable gate arrays (FPGAs) are bought by developers off the shelf and programmed to perform specific tasks, making them ideal for testing purposes since they can be tweaked multiple times depending on requirements. But they are eventually replaced by custom chips that are supposed to be more efficient and cost-effective.
This transition from FPGAs to ASICs has been a headwind for Xilinx's 5G business. However, the chipmaker believes that it has left the ASIC transition behind, and it is now competing for new business. In fact, it wouldn't be surprising to see an uptick in the company's 5G revenue in the coming quarters, as Samsung -- one of its key customers -- has received a big contract that could give Xilinx a much-needed shot in the arm.
Samsung's new contract could be a blessing for Xilinx
Samsung has scored a $6.6 billion contract to rollout Verizon's 5G network in the U.S. over the next five years. This is reportedly one of the biggest deals Samsung has cracked in the networking space.
Though details about the contract are sparse, Xilinx investors should count it as a positive development for the company's 5G prospects because of the chipmaker's deal with Samsung. Earlier this year, Xilinx and Samsung struck a deal under which the South Korean giant would use the former's Versal adaptive compute acceleration platform (ACAP) in global commercial 5G deployments.
Samsung pointed out that Versal will play an important role in boosting the 5G network's capacity substantially by supporting beamforming technology, which makes it possible to transmit multiple data streams to multiple users on the same spectrum simultaneously. These chips will be ready to ship commercially in the fourth quarter of 2020, paving the way for Xilinx's wired and wireless business to pick up the pace in the forthcoming months.
The wired and wireless division accounted for 32% of Xilinx's total revenue in the first quarter of fiscal 2021 (which ended on June 27, 2020). But the ASIC transition hit this segment hard, leading to a 33% year-over-year decline in its revenue. There were signs of a turnaround in this business, however, with the segment's revenue increasing 27% sequentially thanks to an uptick in 5G network rollouts.
Samsung's Verizon contract is likely to help Xilinx sustain this momentum. More importantly, Samsung's latest contract win adds to the Korean company's recent gains in the 5G infrastructure space, and points toward its growing dominance in this vertical. Samsung signed a contract with Spark New Zealand earlier this year to deploy the latter's 5G network, and it could score more such wins going forward thanks to the isolation of Huawei.
All in all, Xilinx could ride Samsung's growing dominance in 5G network infrastructure and regain the mojo that it lost earlier.
Don't miss these catalysts
Xilinx's other segments also seem to be getting back on track. The automotive, broadcast, and consumer business, which supplied 12% of total revenue last quarter, finally saw some positive development after Subaru announced that it would be using Xilinx's chips to power its advanced driver-assistance system (ADAS) in the all-new Levorg.
The automotive business has been a pain for Xilinx of late, as novel coronavirus-related shutdowns have wrecked global economies and brought vehicle manufacturing to a halt. However, vehicle production has started getting back on track once again in certain regions across the globe, and that could bring Xilinx some relief after last quarter's 29% annual revenue decline in this segment.
Meanwhile, the data center business should keep getting better after last quarter's terrific performance, which saw revenue doubling year-over-year. Demand for data center chips is expected to remain strong thanks to the growing demand for more bandwidth in light of 5G deployments.
So Xilinx's 5G catalyst seems to be on track for a fresh lease on life. That's why it would make sense for investors to keep a close watch on this 5G stock in case there's a September stock market crash, as it could be bought for a cheaper valuation if there's a sell-off. Xilinx currently trades at nearly 40 times trailing earnings, which is expensive considering its declining revenue. But a potential turnaround in the company's prospects -- led by 5G -- and a cheaper valuation could make it an enticing bet.
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