"Hate to say I told you so!" -- The Hives
"Great kid, don't get cocky!" -- Han Solo
On Monday, chip-maker extraordinaire Cirrus Logic (Nasdaq: CRUS ) spread its wings and soared, up 15% before the 4 o'clock bell halted its rapid climb. The main catalyst was a bullish upgrade from Jefferies. Needless to say, I agree with the points Jefferies made in its upgrade. I recommended that investors buy Cirrus Logic and bought 80 shares for my "Bits Portfolio" in early November. Those who followed that advice are up 23% today, resoundingly beating a market that has been flat in the same time.
Yet, I'm filled with a mixture of those two quotes seen above today. Yes, I think investors are finally wising up to the fact that Cirrus' place in Apple's (Nasdaq: AAPL ) lineup is more secure than perceived. However, there's also a ways to go, and just because one analyst agrees doesn't mean Cirrus Logic's place as a portfolio winner is assured.
Hate to say I told you so
Looking at the Jefferies upgrade, it echoes several of the key reasons I thought Cirrus Logic was a best buy trading in the $13- per-share range. First of all, the chance of Apple swapping it out for another audio chip wasn't as likely as the discount in its share price indicated. Cirrus Logic produces a premium product and has a design team specially suited to meeting Apple's exacting s tandards. Also, Cirrus Logic's high-end designs provide additional cost savings to companies by reducing other passive components (like capacitors, more on this below). Here's what Cirrus Logic CEO Jason Rhode had to say about the subject during a recent interview with the Fool:
You want to have a good argument that says ... The price of my chip needs to be competitive, but we just saved you $0.50 worth of passive components that goes around my chip, cut us some slack here.
And most folks are pretty receptive to that line of reasoning. It works better for them and better for us and all that. That's really how we got started in portable audio ... we came up with an innovation that removed literally $0.30 worth of fairly large capacitors from a design where the chip itself was on the order of a dollar. It's pretty tough in this space to bomb your price by 30% to hang on to a socket, so we were able to slide in.
For people not familiar with the nerdy intricacies of semiconductor design, capacitors are simple analog components that store small amounts of energy. Along with resistors, they're basic components that can become bulky in small electronics and produce small, but meaningful costs that electronics companies want to remove.
Pivoting from my interview with Cirrus Logic's CEO, look at how website Street Insider characterized Jefferies' upgrade of the company:
"The firm said Cirrus continues to integrate additional external components and features that allows for increasing ASPs while still bringing down Apple's Bill-of-Materials."
Without more information here, it's hard to parse exactly what integration Jefferies is referring to. However, the use of specialized high-end designs to either eliminate or integrate components is pretty much the exact value proposition Jason Rhode referred to. It's also the same key advantage I cited in my buy recommendation: Cirrus not only provides a great product that saves space and power, but does it in a cost-effective manner. That's the kind of advantage you need when competing with giants like Texas Instruments (NYSE: TXN ) , who will always have a scale advantage and bigger sales force.
About being cocky
Yet, there's still a long ways to go for Cirrus Logic. Analyst "channel-checks" and industry sources can be fairly unreliable. Further, I think people are still focusing too much on Apple. Scanning the headlines, we have "Cirrus Cruises Higher on Apple Related Upgrade" and "Cirrus Logic: Jefferies Says Buy on CDMA iPhone."
Yes, the iPhone remains the key catalyst that can power Cirrus Logic forward in coming quarters. However, the company also boasts strong energy products that are showing surprising traction, and the ability to diversify into other smartphone designs is going to be a key factor in the company's continuing stability. If Cirrus' sales pitch of saving costs by integrating (or eliminating) other commoditized components is a siren call to the smartphone makers, those additional wins could power a diversified revenue stream (and with that, higher profits) that investors aren't accounting for now.
The reports of continuing wins at Apple are encouraging, and near-term signs look positive, but it's not time to do a victory lap yet. While Cirrus' continuing inclusion across Apple's product lineup would be great news, the "make or break" mentality of ensuring that Cirrus stays in Apple's lineup isn't a fun long-term game to play. In the coming months, watch for the same value proposition and expertise that won Apple over to make its way into other smartphones. If that event plays out, it'll go a long way toward soothing fears that Cirrus is a "one-trick" pony dependent on Apple for its success.
So enjoy your returns this week, Cirrus investors, but keep an eye out for other catalysts that could drive even greater returns.
Also, to read my original buy recommendation on Cirrus Logic, click here. If you're interested in following my "Bits Portfolio" as I make more buy recommendations, subscribe to my just- launched Twitter feed.