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On Aug 8, 2013, we upgraded FPGA (Field Programmable Gate Arrays) chip maker Xilinx Inc. (XLNX - Analyst Report) to Outperform based on impressive first quarter performance and solid second quarter guidance. Xilinx carries a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Xilinx’s first quarter 2014 earnings per share of 59 cents surpassed the Zacks Consensus Estimate by 19.2%. Revenues dropped slightly year over year but were much above the Zacks Consensus Estimate. Over the past four quarters, Xilinx has delivered an average surprise of 9.6%.

Following the earnings release, the Zacks Consensus Estimate for 2013 went up 11.0% to $2.22 per share. Moreover, the Zacks Consensus Estimate for 2014 also moved up 8.3% to $2.49 per share.

Reasons for the Positive Bias on the Company

Xilinx is seeing continuous demand surge for its 28 nanometer (nm) FPGA chips, which has enabled it to surpass its archrival Altera Corp. (ALTR - Analyst Report). During the first quarter of 2014, sales of these products exceeded $50.0 million, which was much better than the company’s expectations. It expects sales of 28-nm chips to exceed $60.0 million in the second quarter of 2014.

We also believe that Xilinx is going to benefit from the usage of more FPGA chips by telecom companies in their 4G and LTE deployments.

We are also encouraged by the gross margin expansion despite difficult revenue comps. We think that the company’s continued focus on margin expansion, cost reduction across its product portfolio and higher yield would keep it competitively ahead of its peers.

Also, we think Xilinx’s transition into further lower geometries (16nm chips in association with foundry partner Taiwan Semiconductor Manufacturing Ltd.) will prove to be a catalyst.

Other Stocks to Consider

Besides Xilinx, other stocks in the technology sector that are currently performing well include Quantum Corp. (QTM - Snapshot Report) and SanDisk Corp. (SNDK - Analyst Report). Both these companies carry a Zacks Rank #1 (Strong Buy).

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