The need for faster networks and solid growth in data centers are driving infrastructure spending this year. Also, total spending on data centers is estimated to grow 4.5% this year, along with a 2.4% jump in telecom services as opposed to a decline last year, as forecasted by Gartner.
This indicates positive signs. AT&T (T) decided to boost its infrastructure spending for building faster networks. Ma Bell is determined to spend about $14 billion in the coming three years on its wireless and wireline broadband networks, with expansion of 4G LTE being one of its primary objectives.
In addition, telecom spending is anticipated to accelerate across North America and Asia, as telcos have to upgrade their networks after the same was put off last year, according to Infonetics Research. This is good news for many networking and communication equipment providers and component makers, as they will notice an increase in revenue due to spending by the telcos.
Therefore, it is a good idea to look at Xilinx (XLNX, Financial), a component supplier that is on track to benefit from a resurgence in infrastructure spending.
Solid clientele
Xilinx enjoys productive relationships with clients such as Huawei, ZTE, Ericsson and Cisco (CSCO). It supplies chips to equipment makers. Hence, it will certainly benefit from the improvement in carrier spending. These well-established clients are expected to help the company post comparatively better margins in 2014 due to increased spending.
In addition, Xilinx has a strong position in data communications, which will help the company earn market share in the long run. According to Canalys, the data center infrastructure market is expected to exceed $150 billion by 2016 on the back of growth in cloud computing. Hence, this should be good news for Xilinx, as Cisco would be one of the primary drivers of the cloud computing boom. Also, Cisco’s data center division has been on a roll of late, and with further growth in cloud computing, both Cisco and Xilinx stand to benefit.
Impressive technology and cost management
In addition, Xilinx is one of the leading providers of 28nm chips and has successfully translated its superior technology into revenue. It possesses the largest 28nm portfolio in the industry, and saw sales exceed its own target last quarter. But Xilinx isn’t stopping here, and is focusing on the development of 20nm chips in a bid to stay ahead of peers, and to tap the most of the growth in next generation networks.
Besides, Xilinx is managing its costs effectively. In spite of a soft quarter last time, Xilinx is expecting a 210-basis point improvement in the gross margin. Also, Xilinx has a solid track record of managing costs well by way of efficient inventory management, and improving yield on new products, which should increase its chances for recording better margins and increase value for shareholders.
Conclusion
These strategic moves certainly make Xilinx a good investment option. Besides, solid clientele, cutting-edge technology and efficient cost control are positives which should accelerate its growth going forward. Also, Xilinx’s dividend yield of 2.5% isn’t bad either. The company stands to benefit from growth in data and faster networks over the long run, and 2014 could probably the year when the stock takes off.
There’s a high probability that Xilinx would guide for a better future in its upcoming quarters, and that would be an indication that the stock is set for a good year.
