Xilinx, Inc. (XLNX) is a semiconductor manufacturing company, which designs and develops programmable logic semiconductor devices and related software design tools. The company was founded in 1984 and is based in California.
I am bearish on XLNX stock as its valuation is rich and its operating and profit margins have declined over the past years.
Xilinx Business News
Xilinx is going to be acquired by Advanced Micro Devices (AMD), a deal which is expected to materialize during the first quarter of 2022. In late 2020, AMD had reported that the two companies agreed to an “all-stock transaction valued at $35 billion.” The press release went on to state that “The transaction is expected to be immediately accretive to AMD margins, EPS, and free cash flow generation and deliver industry-leading growth.”
AMD also stated that “Xilinx, the No. 1 provider of adaptive computing solutions, increases AMD TAM to $110 billion.”
Both companies, in late December 2021, announced that good progress had been made for the pending business transaction and no additional changes are amended to the previous terms. Additionally, conversation with regulators continues with confidence that the required approvals will be secured.
What is interesting now is a revision of the transaction details and analysis of the fundamentals and valuation of Xilinx.
Transaction Details of the Acquisition
Back in 2020, transaction details announced were “under the terms of the agreement, Xilinx stockholders will receive a fixed exchange ratio of 1.7234 shares of AMD common stock for each share of Xilinx common stock they hold at the closing of the transaction. Based on the exchange ratio, this represents approximately $143 per share of Xilinx common stock.” “…The transaction is intended to qualify as a tax-free reorganization for U.S. federal income tax purposes.”
Fast-forward to present day, AMD stock trades at approximately $132 per share and XLNX stock at $193.07 per share. Both stocks have gained in 2021, AMD has 1-year gains of 41.45% and XLNX gains of about 35%.
Turning our attention to the fixed ratio of 1.7234 shares of AMD common stock for each share of Xilinx common stock, XLNX stockholders are much better off today, getting $231.96 per share rather than $143 as per the initial deal.
This implies a 13.84% premium over current Xilinx stock. I am not sure whether AMD would not want to discuss the terms again, as it is overpaying for a company that is a leader in its class. Is the price right, now? Can this premium be justified? I believe that when looking at the short-term, the premium does not make sense. From a long-term perspective, the combined entity is expected to be an industry leader and a protagonist in technological advancements.
Xilinx offers solutions for multiple industries, such as Aerospace & Defense, Automotive, Data Center, Healthcare & Sciences, Industrial & Vision.
What about the company’s fundamentals?
Xilinx Fundamentals – Risks
Xilinx has a strong balance sheet with a Current Ratio of 6.81, indicating it is financially healthy and has no problem in meeting its short-term obligations. The firm’s earnings are growing more than its dividend, making dividend growth sustainable, and the profit margin of 23.06% is amongst the best of the semiconductor & semiconductor equipment industries.
XLNX stock earnings have been strong as of Q2 2020. Its current valuation is high among other Dividend Stocks, and it outperformed the Nasdaq (NDX 100) in 2021.
The operating margin has been in a 5-year decline. The average rate of decline per year is -4.3%.
The TTM net margin of 23.06% has been higher than the FY21 net margin of 20.54%. Xilinx had a two-year consecutive drop in its net margin for FY20 and FY21.
Valuation: A Rich Stock
With a Price/Earnings Ratio of 63.32, XLNX is valued higher than the industry average, which is at 27.52. Compared to an average industry price-book ratio of 5.94, XLNX is valued more expensive than its industry peers. The Forward Price/Earnings Ratio of 49.26 indicates a lofty current valuation.
Wall Street Take
Xilinx has a Hold consensus, based on one Buy and eight Hold ratings. The average Xilinx price target of $198.67 represents a 12-month 2.90% upside potential.
Xilinx stock has strong fundamentals but is relatively expensive at the moment. The company’s fate is subject to its acquisition by AMD. The deal is expected to materialize but there are risks until it is approved.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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