This article is part of our Rising Star Portfolios series.
As part of the Fool's real-money Rising Star series, I've structured my portfolio to seek out technology-focused companies. Last month, I went back to the well and made a repeat purchase of an earlier recommendation, buying more shares of Qualcomm (Nasdaq: QCOM ) ahead of its excellent second-quarter earnings report.
This month, I'm headed back to the well again. I'm scooping up more shares of Cirrus Logic (Nasdaq: CRUS ) , a company that's ridden Apple's (Nasdaq: AAPL ) coattails to record levels of profitability, but has seen its stock falter as production issues on a recent design rattled investors. The event highlighted the execution risk that could undermine Cirrus' future growth within Apple's product lines. However, I feel that given the known risks, Cirrus remains attractively priced.
However, I'm also looking to add Google (Nasdaq: GOOG ) to the portfolio. While the businesses of Google and Cirrus Logic couldn't be any different, my rationale for buying both stocks is the same.
Our mobile future
A key theme of the portfolio I'm building is that mobile, connected devices will be a change on par with the emergence of the personal computer in the 1980s. This extends well beyond the idea of general smartphone or tablet sales, and into a broader "consumerization of information technology" trend. Taken at face value, the idea of information technology becoming driven by consumers might not sound important, but the implications are profound. Throughout history, advancements from large enterprise-focused companies have driven the future of computing. Consumer buying habits followed markets that businesses created.
Today, that equation has been flipped on its head. Companies like Apple, Google, and a host of startups are driving not only consumer buying habits, but also the direction of IT. One only needs to look at the emergence of tablets to understand this sea change. When the PC was first introduced, it spent years as a tool of large businesses before migrating into homes. Tablets, however, were first adopted by consumers, leaving businesses scrambling to see how they could integrate them into their IT infrastructure. A year after the release of the iPad, the device which began the current tablet phenomenon, tablet sales should easily surpass the level of PC sales seen in 1993 (more than a decade after the first IBM PC was introduced), despite currently being only a consumer phenomenon.
This change cuts to the center of the IT establishment and requires a level of reprogramming for technology investors. It also foreshadows that consumer-friendly devices like Apple's iPad and iPhone and operating systems like Google Android will continue taking share from traditional enterprise platforms such as Windows and Research In Motion's BlackBerry line-up. While the overall picture for mobile is bright, I want to further target companies benefitting from the trend outlined above.
Why Cirrus Logic and Google
I have to be honest: I'd been closing in on making Citrix (Nasdaq: CTXS ) the next addition to the portfolio. While I already have exposure to virtualization, thanks to portfolio stalwart EMC's majority ownership of VMware (Nasdaq: VMW ) , I like Citrix's place in desktop virtualization and other technologies that I think will be increasingly importance in IT's consumerized future.
However, Citrix produced glowing earnings today, pushing the stock up another 9% (the stock now sits nearly 30% above where it was when I first started watching it). I was already concerned about the price I would have been paying for Citrix, so today's run-up gave me pause and made me look at a couple of beaten-down mobile winners. Unlike highflier Citrix, both Google and Cirrus Logic have seen their share prices cut down sharply in recent months. In the past three months, Google trails the Nasdaq by about 17%, while Cirrus logic lags by 28%.
There's a basis for this fear. In Google's case, operating expenses are exploding faster than revenue, and investors fear that newly instituted CEO Larry Page won't have the same fiscal prudence previous CEO Eric Schmidt exhibited. I sympathize with this fear; Page is known to be a visionary who chases dreams of dubious future profitability. However, these fears have moved Google's share price back into a range that leaves investors well-compensated for the risk of rising expenses. Google trades at just 16 times this year's projected profitability and holds nearly 20% of its market cap in net cash.
That's a very attractive value for a company whose dominant position in search should remain unchallenged for the foreseeable future, a company that controls one of the most valuable mobile platforms, and a company whose revenue opportunities should only increase in a location-aware future where search becomes more targeted.
Moving on to Cirrus Logic, yes, the company did have a recent production problem, and it did forecast weak guidance in its earnings call. On the production front, even if Cirrus is well-designed into Apple's mobile products, I think malfunctioning designs and other unknown execution risks remain a great threat. However, like Apple supplier TriQuint (Nasdaq: TQNT ) before it, I like that Cirrus Logic appears to have gotten ahead of the problem, rather than delivering faulty or delayed chips to whatever customer (likely Apple) was at the center of the recent production issues.
In the meantime, I still believe that Cirrus remains one of the companies best levered to the continuing growth of Apple's mobile lineup, in both tablets and smartphones. While the coming months might prove bumpy, as Apple outperforms across the holiday season on the strength of the iPad 2 and the next iPhone design, I think the fortunes of Cirrus shareholders will once again turn.
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