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Actionable news in MLNX: Mellanox Technologies, Ltd.,

Key Predictions for XLNX, NXPI, SLAB and MLNX's Earnings

The Q3 earnings cycle in full swing with a number of semiconductor companies slated to report the quarterly numbers over the next few days. The industry serves as a driver, enabler and indicator of technological progress.

According to the latest Earnings Preview, technology is one of the four sectors that is anticipated to report strong earnings growth in the third quarter. The other three are Oil/Energy, Industrial Products and Construction. Various technology giants, including Alphabet GOOGL, Microsoft MSFT and Amazon AMZN, are scheduled to report quarterly numbers this week. Per the report, total earnings for the tech sector are projected to be up 9.9% on 7.1% higher revenues.

We note that the technology sector has been an impressive performer on a year-to-date basis. The sector is benefiting from increasing demand for cloud-based platforms, growing adoption of Artificial Intelligence (AI) solutions, Augmented/Virtual reality devices, autonomous cars, advanced driver assisted systems (ADAS) and Internet of Things (IoT) related software.

We believe the aforementioned emerging trends have provided some much-needed opportunity to semiconductor companies to counter the loss of business due to the declining PC market which still consumes bulk of chips.

However, this does not ensure earnings beat for all companies in the space. It should be noted that a company’s earnings outperformance is dependent on the overall business environment as well as management’s ability to implement operating and strategic plans.

In other words, a company may perform dismally despite a favorable business environment if it fails to capitalize on the opportunities due to lack of execution.

Notably, our research shows that when a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) stock is combined with a positive Earnings ESP, the chance of beating earnings estimates is high. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Let’s see what’s in store for these semiconductor stocks, all of which are expected to release quarterly numbers tomorrow.

Xilinx Inc. XLNX, which will report second-quarter fiscal 2018 results, is set to capitalize on the global trend of field-programmable gate arrays (FPGAs) replacing application-specified integrated circuits (ASICs). We expect FPGA products to drive the company’s revenues throughout fiscal 2018, aided by steady demand in communications industry, and continued strong adoption of its products in the Automotive, ISM, Test and Aerospace and Defense markets. Moreover, design wins from other sectors such as wired communication, data center and industrial will add to revenues. (Read: Key Factors Likely to Drive Xilinx's Q2 Earnings)

Notably, the company’s earnings have outpaced the Zacks Consensus Estimate by an average of 7.4% in the trailing four quarters. Xilinx has an Earnings ESP of +0.22% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Further, the Zacks Consensus Estimate of 62 cents for the fiscal second quarter has remained unchanged in the last 30 days. The Consensus Estimate for the company’s revenues is pegged at $620.4 million for the to-be-reported quarter, up 7.1% from second-quarter fiscal 2017.

Let’s take a sneak peek at NXP Semiconductors NV NXPI, which is set to report third-quarter 2017 results. Continued strong adoption of tablets and smartphones, automotive electronics, and the emergence of the new category of wearables have been boosting the demand for processing and sensing devices that run them. We believe this should benefit NXP Semiconductor’s third-quarter revenues. Nonetheless, macroeconomic weakness, competition from Xilinx and Lattice Semiconductor Corp., consolidation in the telecom market and declining margins remain headwinds. (Read: NXP Semiconductors Q3 Earnings: What's in Store?)

NXP Semiconductors has an Earnings ESP of -1.18% and carries a Zacks Rank #3. The Zacks Consensus Estimate of $1.04 for the third quarter remained unchanged in a month’s time. The Consensus Estimate for the company’s revenues is pegged at $2.29 billion for the quarter, down 7.2% from the year-earlier quarter.

NXP Semiconductors N.V. Price and EPS Surprise

Silicon Laboratories Inc. SLAB, a global fabless semiconductor company involved in designing, developing and marketing mixed-signal analog intensive integrated circuits (ICs), will report third-quarter 2017 results. Analysts covering the stock believe the company will benefit from increasing demand for its IoT products across the automotive, industrial and consumer end markets. Nevertheless, stiff competition from NXP Semiconductors and Texas Instruments is a major headwind.

Silicon Laboratories has an Earnings ESP of -0.49% and carries a Zacks Rank #2. The Zacks Consensus Estimate of 81 cents for the third quarter remained unchanged in a month’s time. The Consensus Estimate for the company’s revenues is pegged at $196.2 million for the quarter under review, up 10.2% from third-quarter 2016.

Silicon Laboratories, Inc. Price and EPS Surprise

Lastly, Mellanox Technologies Inc. MLNX will report third-quarter 2017 results. The exponential growth in data bodes well for Mellanox’s interconnect solutions owing to growing demand for higher network speeds for fast processing of data. In addition to this, collaborations with the likes of VMware and Hewlett Packard Enterprises have helped the company gain strong footprint in the cloud and data-center market. All this should support the company’s to-be-reported quarter’s overall performance. Nevertheless, stiff competition from Intel is a major headwind. Although Mellanox haven’t lost any market share (according to management) in the recent quarter, Intel’s aggressive pricing strategy remains a concern, in our view.

Mellanox has an Earnings ESP of +1.84% and carries a Zacks Rank #5 (Strong Sell). Notably, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

The Zacks Consensus Estimate of 64 cents for the third quarter remained unchanged in a month’s time. The Consensus Estimate for the company’s revenues is pegged at $226.3 million for the quarter to be reported, up 1.1% from the prior-year quarter.

Mellanox Technologies, Ltd. Price and EPS Surprise

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