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Have Semis Gone Secular?

Investors may think the logical play following Altera’s guidance bump, where the company increased its first-quarter revenue projections, is Altera. But Cramer on Thursday said the better stock was Xilinx , a fellow member of the chipmaker cohort that’s fueling the smartphone revolution.

“I still think Xilinx is a buy even though it’s flirting with its 52-week high,” the Mad Money host said, “as I believe it has a lot more room to run.”

Xilinx is up 35% since Cramer recommended the stock a year ago, a fact that analysts may attribute to an overall improvement in the economy. But it’s much more than that. These chipmakers are seeing more and more business thanks the mobile Internet, Cramer said. All-in-one smartphones aren’t a luxury anymore, they’re a necessity. And this sea change, one on par with the adoption of the PC, is bringing in a ton of business.

Xilinx makes programmable logic devices, or PLDs, which are used to manage the interchange and manipulation of digital signals within a system. And they’re useful because they’re cheaper, they require shorter design cycles and offer more flexibility than application-specific chips. You’ll find PLDs in every end market from communications and industrial to consumer and auto and data-processing applications.

Management expects these markets to grow at a compound annual rate of 8% to 12% over the next five years, which Cramer said is a direct result of the “mobile Internet tsunami.” They certainly played a key role in the company’s most recent quarter, reported at the end of January, where Xilinx beat earnings estimates and saw 24% revenue growth sequentially. Gross margins were up, too, which means the company’s getting more profitable.

Best of all, these positives should continue. Management on the conference call said that six of its 10 secondary end markets still haven’t reached the levels where they were at the company’s previous revenue peak in the June 2008 quarter. And Xilinx expects “secondary end markets to recover above the June 2008 levels over the next year,” management said. Also, inventories are still down 10% below those prior to the downturn, so there’s plenty of room left for the company to grow.

Xilinx, trading at 14.7 times earnings with a 14% growth rate, is cheap, and it offers a respectable 2.4% dividend yield. So if you like what Altera had to say yesterday, Cramer said, consider buying XLNX instead. And good opportunity is coming as soon as Friday morning: He expects the stock to open down because Wall Street didn't seem to like Marvell Technology's latest earnings report, which came after Thursday's close. So watch for that.

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