Cirrus Logic's Turnaround Looks Like a Pipe Dream

Cirrus Logic's (NASDAQ: CRUS  ) problems are getting worse. If posting a 28% year-over-year drop in revenue in the fourth quarter, seeing its earnings slashed in half, and overpaying for an acquisition that might not add much value to its business in the long run was not enough; losing more business from Apple (NASDAQ: AAPL  ) will certainly raise another red flag for investors who have bet on a turnaround.

Running on fumes
Remarkably, Cirrus shares have gained more than 15% this year, even though the company's performance has been downright bad. Over-reliance on Apple for a major portion of its revenue has proved to be Cirrus' Achilles Heel, and now it looks like this relationship is taking a turn for the worse.

Earlier in June, Pacific Crest Securities reported that Cirrus is losing content at Apple to Maxim Integrated Products (NASDAQ: MXIM  ) . According to Pacific Crest analyst John Vinh (via Investor's Business Daily), "We believe that Maxim has won multiple audio amplifier sockets on Apple's upcoming new products. Maxim's win is primarily due to better dynamic power performance." 

Now, Vinh points out that this probable loss will cost Cirrus $0.50 of content per unit, and reduce its earnings in the next fiscal year by $0.20 to $0.25 per share. This expected loss will compound Cirrus' problems further, as the company's bottom line is already expected to erode at the rate of 3% for the next five years. 

Maxim's running away
It won't be the first time that Cirrus is losing business to Maxim if Pacific Crest's report is credible. Last year, it had conceded the audio amplifier slot in the iPad Air to Maxim. Now, it seems like Maxim will land higher content in Apple's iPhone 6 and the rumored smartwatch. In fact, according to Pacific Crest, Maxim might see additional revenue anywhere between $73 million and $329 million as a result of its content wins. 

This is bad news for Cirrus. Investors are already betting against the stock as a short float of almost 21% indicates. The bulls might hope that Cirrus' acquisition of Wolfson, for which it had paid a premium of 75% earlier this year, will help it gain traction at Samsung. However, content losses at Apple signify Cirrus' innovation is losing steam and its competitors are coming up with better products.

Will Wolfson come to the rescue?
Wolfson supplied chips for the Samsung Galaxy S5, but even then, the company's revenue was down almost 40% year-over-year in the previous quarter. The massive decline was a result of an anticipated transition from 3G to 4G smartphones, as a result of which phone manufacturers didn't buy enough chips from Wolfson. This indicates that Samsung alone wasn't capable of pulling up Wolfson's revenue, which is why the company had to endure such a steep revenue drop.

Moreover, the Wolfson acquisition might not bring a big level of diversity to Cirrus' business. Fool analyst Evan Niu is of the view that Apple will still contribute around 70% to Cirrus' top line after the acquisition. So, the purpose of buying Wolfson, i.e. diversification, would not be fulfilled.

Don't be hopeful
Finally, Cirrus' valuation is not in its favor. The stock trades at 14.4 times last year's earnings, but its forward P/E multiple is higher at almost 17x. This indicates a decline in earnings, which is no surprise given Cirrus' recent performance and the troubles that it is facing.

It would be a good idea for Cirrus bulls to reconsider their position. Although the stock has gained this year, it is running on fumes with no solid catalyst in sight. Moreover, Apple's upcoming iPhone will be a driver for several component suppliers, but not Cirrus. For example, last quarter, even though iPhone sales increased, year over year, Cirrus' revenue dropped. Since the chip maker is now probably losing content at Cupertino, things could get worse.

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