For a long time, Xilinx (XLNX) and Altera (ALTR) have maintained a duopoly in the field of programmable logic semiconductors. Over a period of time, these two companies have conceded very little market share to the likes of Lattice (LSCC). Bigger players such as Intel (INTC) and Advanced Micro Devices (AMD) have also tried to enter the programmable logic market but failed.
Programmable Logic Devices (PLD) are integrated circuits that have an unspecified function at the time of manufacture and are programmed after the manufacture to perform a specific function. An important variant is Field Programmable Gate Arrays (FPGA); FPGA’s contain logic blocks and a hierarchy of interconnects that can be configured to change the configuration or design a new configuration after the chip is manufactured.
PLD’S are widely used in industrial, aerospace, automotive, electronics, medical, computing, and communications markets. Wireless communication markets have been the fastest growing segment.
Xilinx, at one time, was a pioneer at the cutting edge of technology and operating models. It pioneered fabless manufacturing and invented FPGA. Over the last few years, Xilinx fell behind Altera technologically. Xilinx almost skipped an entire generation of advancement. The result is that Altera has been growing much faster than Xilinx.
The stock price of Xilinx has lagged behind Altera as illustrated in the chart. Now Xilinx appears to have caught up with Altera in technology, but the stock is comparatively cheap. PLD’s are a secular growth story, and the duopoly has afforded these companies exceptionally large gross margins. These characteristics make Xilinx an ideal acquisition candidate.
Over the last few months, there have been rumors that Altera is an acquisition target of Oracle (ORCL). These rumors, in part, have contributed to a run up in the Altera stock. I have previously debunked these rumors on my blog. Research at The Arora Report shows that Intel (INTC) is the most likely acquirer. Intel is looking for growth drivers and is especially keen on expanding in the wireless market. There are also synergies to take significant costs out of Xilinx operations. Xilinx is not only a good fit for Intel, but it is cheap.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in XLNX over the next 72 hours.
Additional disclosure: I will initiate a position only if all six screens of ZYX Change Method.