Is Cirrus Logic Attractive Ahead of the iPhone 6 Launch?

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.

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  • Report this Comment On June 25, 2014, at 2:34 PM, tomtk wrote:

    I don't believe margins can be the whole story. Plot Cirrus's revenues vs the number of devices Apple has sold. The former has dropped rather significantly over the last year even as the latter went up. This would seem to indicate Apple has been pressuring them on ASPs, which further implies the value of those "differentiated" codecs has declined greatly, which makes one wonder how "specialized" and thus sticky they really are.

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Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

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