Xilinx Stock Overpriced At $104?
After a 1.5x rise since its low in March, at the current price of around $104 per share, we believe Xilinx stock (NASDAQ: XLNX) could see significant downside. Xilinx manufactures semiconductor devices used across a wide variety of sectors such as aerospace, defense, AI/ML, data center, and communications. The stock has jumped to a level higher than where it was before the drop in March, but in reality, demand and revenues will likely be negatively affected this year. Xilinx stock has already rallied from $69 to around $104 off the recent bottom compared to the S&P 500 which moved 49%.
Xilinx stock is up about 25% from levels seen at the end of 2018, over 1.5 years ago. This rise came due to a 28% rise in revenue, which combined with a 1% increase in the outstanding share count, translated into an 27% rise in revenue per share (RPS).
Further, its P/S multiple dropped from 8.4x in 2018 to 8x in 2019. However, the P/S multiple has since risen to 8.2x so far this year, and we believe the stock could see further downside, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove 24% Change in Xilinx Stock between 2018 and now? has the underlying numbers.
So what’s the likely trigger and timing for this downside?
The global spread of Coronavirus has led to a surge in online activity and data center usage, which should lead to a rise in demand from the data center, communications, and AI/ML sectors. However, the drop in demand from other sectors that use Xilinx’s semiconductor products, namely demand from the automotive, industrial, aerospace, and defense industries will likely outweigh data center demand. Xilinx’s Q1 ’20 earnings in July confirmed this as revenue came in at $727 million, down 15% from $850 million in Q1 2019. Further, higher operating expenses and a higher effective tax rate (42% in Q1 2020 vs 8% in Q1 2019) meant that EPS dropped substantially to $0.39, from $0.95 for the same period last year. We expect this trend to continue in the medium term and we believe Xilinx’s Q2 results in October will confirm this.
If there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/S decline from the current level of 8.2x to around 7.5x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $90.
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