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This article is part of our Rising Star Portfolios series.
Back in November, at the launch of our Rising Star Portfolios series, I picked Cirrus Logic (Nasdaq: CRUS ) as the first stock in my tech-focused portfolio. At the time, Cirrus had just come off earnings that cratered its share price. Like other semiconductor stocks, Cirrus is a bit of a bouncing ball, moving up and down with little rhyme or reason. However, at that time I thought it'd fallen too far and its position across largest customer Apple's (Nasdaq: AAPL ) was stronger than investors believed.
Well, as a bouncing ball will do, Cirrus quickly skyrocketed. By early February, it was nearly a double, an astonishingly quick rise in such a short period. However, those gains weren't meant to last. Since that time, the widely watched Philadelphia Semiconductor Index has retreated 15%. Worse yet, a general sell-off in mobile swept the market. Stocks with a strong presence in mobile such as NVIDIA (Nasdaq: NVDA ) , Apple, ARM Holding (Nasdaq: ARMH ) , and Cirrus Logic have either sold off heavily or lagged the index since those early February highs.
In Cirrus' case, the sell-off was especially heavy. The company is off 40% since its February high point. With that in mind, let's take a look at some of the specific points that have been scaring investors along with what lies ahead for Cirrus.
Obviously, Cirrus' fortune is tied to Apple. The company collects 54% of its revenue from the mobile king. Any hint that their relationship is souring will be greeted with broad selling. That in large part plays into my thesis. While many investors bought into Cirrus during the run-up on the promise of their ability to ride Apple's coattails, they either don't understand or fully appreciate how well-engrained their products are across Apple's product line. It's not impossible for a competitor to boot Cirrus out, but it's pretty darn hard.
So when Cirrus Logic posted preliminary fourth-quarter results in mid-April that included a loss due to a "low-yielding product during a major product launch," investors headed for the exits. In my opinion, it's an unfortunate speed bump, but not something that is a fatal blow to Cirrus' relationship with Apple. First, the faulty part appears to be related to MacBooks. That's a line that does well for Cirrus, but let's be honest. We're all in the stock for Cirrus' exposure to mobile devices like the iPhone and the iPad.
Second, Cirrus appears to have handled the situation exactly as a key Apple supplier should. If there's a problem, don't sugarcoat it and risk delivering a faulty product. Get it out in the open with Apple, take the write-off charge, and work day and night to make it right. More so than other competitors, Apple is a company with an uncompromising focus on quality. The worst thing a vendor can do is try to cover their mistake instead of getting ahead of it, warning Apple, and making it right.
A similar situation occurred at TriQuint (Nasdaq: TQNT ) , another Apple-focused component supplier in the portfolio. It simply didn't have enough capacity to meet the demands of the CDMA iPhone that was readying for Verizon's launch. However, it got ahead of the situation, and all indications point to TriQuint warning Apple it might not be able to meet demand and should be designed out of the CDMA iPhone. With numerous reports, TriQuint is still prominently in the next iPhone refresh while Avago (Nasdaq: AVGO ) will displace Skyworks (Nasdaq: SWKS ) in the phone. That points to Apple being willing to overlook supplier snafus so long as they warn early and correct the problems at hand.
Not good, either
The other elephant in Cirrus' closet once again relates to Apple. June has come and gone, and there's no iPhone 5. For investors used to yearly refreshes, that's a scary thought. Could Apple be losing its mojo? However, investors should ignore the noise and doubts this creates. Apple will likely release a refreshed iPhone in September, possibly with a shorter refresh cycle for a more radically designed model to follow. In any case, the iPhone combined with the iPad still look to deliver solid year-over-year growth headed into the holidays, a fact which should help propel Cirrus' revenues forward later in the year.
Looking to the future
A couple notes on recent headlines that could affect Cirrus Logic.
- Audio chip peer Wolfson recently warned that sales for the current quarter would come up light. Formerly, that might have been more of a concern for Cirrus, but with sales to its audio unit so heavily tied to Apple's direction, the company is increasingly decoupled from broad audio chip supply issues. Still, it's something to keep an eye on.
- Research firm Strategies Unlimited recently predicted the LED driver integrated controller market would grow by a 12% compounded growth rate through 2015. Cirrus has been targeting this market as a future growth area in its energy segment. It's an attractive opportunity for companies offering unique solutions because the market is so fragmented and open to new competition. While Texas Instruments is the top dog, the top 10 firms control 55% of the market with a wide number of smaller competitors carving up remaining demand.
That's it for this checkup on Cirrus Logic. To keep updated on all events surrounding the company, make sure to add it to your free watchlist: