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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers