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Can Anything Stop Cirrus Logic?

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Shares of Cirrus Logic (Nasdaq: CRUS  ) hit a 52-week high on Friday. Let's take a look at how it got there and see whether clear skies are still in the forecast.

How it got here
One word aptly sums up Cirrus Logic's ride to the top: Apple (Nasdaq: AAPL  ) . Apple is responsible for about 70% of Cirrus' revenue stream, so maintaining and/or adding to its presence in upcoming iPhone models is crucial to Cirrus' success.

Cirrus, which provides the audio technology in Apple's iPhone that provides amplification, echo cancellation, and noise suppression, had a very ho-hum quarter highlighted by Apple's drop from selling just 26 million iPhones, as opposed to 35 million in the prior quarter. Where the excitement went off the charts was in Cirrus' second-quarter guidance, which virtually assures that the iPhone 5 launch later this year is expected to be epic. Cirrus is forecasting sequential revenue growth of 70% to 90%, which blew Wall Street estimates clean out of the water. It also served to relieve shareholders who wondered (but assumed) whether Cirrus was the logical audio choice for the next-generation iPhone.

However, things haven't been picture-perfect for iPhone component suppliers. As I highlighted one month ago, most suppliers, with the rare exception of Cirrus Logic and Skyworks Solutions, haven't translated their product and license wins in the iPhone into big stock gains. Broadcom (Nasdaq: BRCM  ) , which provides the Wi-Fi/Bluetooth wireless connectivity chips for the iPhone, has seen its share price remain relatively flat over the past year despite surging iPhone sales. Shareholders of TriQuint Semiconductor (Nasdaq: TQNT  ) , which provides transit modules for the iPhone, and Nuance Communications (Nasdaq: NUAN  ) , the company behind the now-famous Siri speech-recognition software, would love for their stocks to head higher. Both are more than 20% off their 52-week highs.

How it stacks up
To deviate from the norm, this is where we'd usually compare Cirrus Logic against its peers, but the only real competition Cirrus has is against itself.

CRUS Chart

CRUS data by YCharts

Cirrus has been on fire over the past five years, and shareholders have very little to complain about.

One area that could potentially be Cirrus' downfall is its overreliance on Apple for its revenue. In good times, Cirrus shares are obviously going to benefit, as we saw with its price surge late last month. However, Cirrus is also very vulnerable to Apple's product cycle. This means that when a new iPhone is due out, consumers will opt to holster their money and wait for the new product rather than purchase the current model, pushing orders out into quarters down the road. That can make for a very erratic and unpredictable sales history; and as you well know, Wall Street hates uncertainty.

What's next
Now for the $64,000 question: What's next for Cirrus Logic? That question depends entirely on whether Apple successfully launches its iPhone 5 in the fall and if Cirrus Logic can find a way to diversify its revenue stream beyond just Apple.

Our very own CAPS community gives the company a four-star rating (out of five), with a ridiculous 95.9% of members expecting it to outperform. I've yet to weigh in with a CAPScall on Cirrus Logic, and I'm choosing to yet again continue to wait on the sidelines.

At its current valuation, Cirrus Logic has little room for error. The iPhone 5 launch will need to go flawlessly (and Apple does have a pretty darn good record of launching new products), and Cirrus will need sales strength to carry for at least three quarters. However, we all know that Apple's product cycles are never like clockwork. Cirrus is one of those companies you buy when Apple's sales slow because of natural iPhone product cycles and consider selling when it's a few weeks from launching a next-gen iPhone. With little in the way of revenue diversity, I'll choose to add Cirrus to My Watchlist and keep an eye on it from the sidelines.

With the iPhone 5 expected to launch this fall, the stakes for Apple and its shareholders couldn't be higher. Luckily for you, our analysts have been digging deep to give you the most unbiased research on Apple in our latest premium research report. In it, you'll find what opportunities and pitfalls could move Apple's stock higher or lower, and, best of all, it comes complete with a year of updates. For less than a week's worth of coffee, you, too, can get your investing edge. Get your copy.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Cirrus Logic, Apple, and TriQuint Semiconductor. Motley Fool newsletter services have recommended buying shares of Apple and Nuance Communications, as well as creating a bull call spread on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 23, 2012, at 9:53 AM, lund007 wrote:

    motley fool ki ma ka chut!

  • Report this Comment On August 30, 2012, at 11:44 PM, JAVKO wrote:

    Rev is growing, sure. But will that translate into higher earnings?

    The last 3 Q3 have seen EPS fall from 0.43 to 0.36 and 0.22. Mk't expects next Q EPs to be X3 last Q!! Despite its link to Apple, its trailing P/E is > 31!!!!!!! So if margins are not improving, why should this Co command a P/E which is 2.5 X Apple???????????

    Look at TQNT. Do you see a similar story? Their only moat is their link, huge overdependence, on Apple.

    Afterall, these are components makers and not biotech, cloud, internet or software companies!

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