Does This Wild Ride Make Any Sense?

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It's been a tough week for Cirrus Logic (Nasdaq: CRUS  ) .

First, the company crushed earnings estimates and issued rosy-cheeked forward guidance, only to see its share price plunge as much as 16% the next day. Then the slaughter continued on Friday with another 10% freefall.

The designer of audio and power controller chips for everything from smartphones to garage door openers also said its sales are pretty much unlimited right now. Orders are coming in so fast that Cirrus can't hire qualified engineers quickly enough to take advantage of the rush. "We've got multiple products we wish we could do for every product we're able to staff," said CEO Jason Rhode. It's kind of a nice problem to have, if you ask me.

All along, analysts stayed by and large positive with more upgrades and price target boosts than negative recommendation actions. But still, share prices tumbled.

Some say investors might worry about margin pressures. Largest customer Apple (Nasdaq: AAPL  ) is known to play hardball with component suppliers, and management did guide to slightly softer gross margins in coming quarters.

But I don't think that theory holds water. Rhode had a perfectly reasonable explanation for the margin squeeze: "We think that nothing has really fundamentally changed about the business. But as I said earlier, the volumes and revenue ramped up quite a lot. So it's not at all surprising that there should be a little bit more pricing pressure that goes with that."

In other words, we're selling tons of chips and our customers are starting to expect volume discounts. Fair enough.

Moreover, the gross margin damage is only a couple of percentage points -- hardly worthy of a 20% blast to Cirrus' market cap.

So what is everybody missing? Well, have a look at this simple chart:

CRUS data by YCharts

Even after this week's drastic drop, Cirrus has absolutely mauled the markets over the last year. The stock is still up 94%, far ahead of the Dow Jones Industrial Average (INDEX: ^DJI  ) at just 11% and chip sector tracker Semiconductor HOLDRs Trust (NYSEMKT: SMH  ) trading essentially sideways. Cirrus even beats sugar daddy Apple, though Cupertino hardly embarrassed itself with a 44% gain.

In short, I think we're looking at a heavy round of profit-taking and rebalancing. Don't forget that we're reaching the end of 2012, which gives many investors reason to rebalance their holdings for tax purposes. There's nothing fundamentally wrong with Cirrus, but the 183% year-to-date gains that the stock recently topped out at may have made some shareholders queasy.

Cirrus certainly hitched its wagon to a strong horse. The introduction of the iPhone 5 was an event Apple investors had been looking forward to for months. The stakes were (and continue to be) high and the opportunity huge, so to help investors understand this epic Apple event, we've released an exclusive update dedicated to the iPhone 5 launch. By picking up a copy of our premium research report on Apple, you'll learn everything you need to know about the launch and receive ongoing guidance as key news hits. Claim your copy today by clicking here now.

Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders' bio and holdings, or follow him on Twitter and Google+. The Motley Fool owns shares of Apple and Cirrus Logic. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

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10/20/2016 3:22 PM
^DJI $18187.21 Down -15.41 -0.08%
AAPL $117.09 Down -0.03 -0.03%
Apple CAPS Rating: ****
CRUS $53.90 Up +0.62 +1.16%
Cirrus Logic CAPS Rating: ****
SMH $68.08 Up +0.68 +1.01%
Semiconductor HOLD… CAPS Rating: *