Is Cirrus Logic Attractive Ahead of the iPhone 6 Launch?

With Apple's product cycle set to go into full-swing in just a few short months, is Cirrus Logic -- a chip supplier with heavy exposure to Apple -- a good way to play it?

Jun 24, 2014 at 10:30AM

It wasn't all too long ago that Cirrus Logic (NASDAQ:CRUS), a developer of mixed-signal/analog semiconductors, was seriously out of favor. The stock sold off pretty heavily in January on pessimism surrounding major customer Apple (NASDAQ:AAPL). Further, content share loss at Apple had become a concern following the loss of the audio amplifier socket to Maxim Integrated Products (NASDAQ:MXIM) with the iPad Air. With Apple now thoroughly back in favor, should investors give Cirrus a second look?

Could Cirrus lose further content share?
There seems to be very little fear that Apple's upcoming product cycle should be quite good to Apple and its suppliers. As north of 80% of Cirrus' revenue base is derived from sales to Apple, what's good for Apple is typically good for Cirrus.

The big problem, though, is that since Cirrus depends on Apple for so much of its revenue base, Apple has significant bargaining power and could pressure margins pretty materially. Further, in situations where Apple decides to go with an alternate supplier (in the case of the audio amplifier in the iPad Air), Cirrus sees at the very least a hit to sentiment if not a material revenue impact.

The good news, though, is that while Cirrus lost the audio amplifier in the iPad Air, this is a fairly cheap, commodity part. The audio CODEC, on the other hand, is fairly specialized/differentiated, so Apple would need to collaborate early on with an alternate vendor to replace Cirrus. 

What about margins?
The next concern, then, is margins. Though Apple could certainly find an alternate vendor for the audio CODEC, it's probably unlikely that said vendor will be willing to concede too much on the margin front. In fact, Cirrus' margins are already well off the peak seen in 2011 but at the same time are showing signs of bottoming, which helps to support the argument that it probably won't get too much worse from here. 

CRUS Gross Profit Margin (TTM) Chart

CRUS Gross Profit Margin (TTM) data by YCharts

OK, does that mean Cirrus is a screaming buy?
With margins likely having bottomed, share at Apple still mostly secure, and with Apple itself preparing for what could be its best fall product cycle in years, is Cirrus a screaming buy? Well, there's another side to this story.

According to Pacific Crest's Michael McConnell, Maxim has won some content share in the iPhone 6 (either the audio amplifier, biometric sensor, or both) -- a repeat of what happened with the iPad Air. While this isn't necessarily a confirmation that this is actually the case, it is now a distinct risk. That said, given that the stock shrugged that report off, investors likely already factored in further content share loss.

The good news, though, is that if Cirrus didn't actually lose that share, then the stock could rise further following the inevitable iPhone 6 and refreshed iPad teardowns. There are still plenty of unknowns here.

Foolish bottom line
Cirrus shares aren't exactly expensive today at about 13.3 times the current fiscal year's earnings. But with analyst consensus for the following fiscal year (ending in March 2016) calling for anemic revenue growth on the order of 4.80% and for earnings per share to decline to $1.42 from $1.79 in the current year, the stock isn't exactly pricing in a lot of optimism.

The bottom line is this: If you believe that Cirrus can do meaningfully better than what consensus sits at for the coming fiscal year, then the stock is likely to appreciate as estimates come up. But if the decline does manifest itself, all eyes will be on what estimates for the fiscal year ending in March 2017 look like.

Like those who bought Cirrus at $5, you can be one of the first to profit when Apple's new smart device appears
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Cirrus Logic. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information