No Ifs, Ands, or Buts: This Is a Fire Sale

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Cirrus Logic (Nasdaq: CRUS  ) may look like a loser today thanks to a sharp drop in its share price, but then you're just looking at a stock chart and not the underlying business.

Being the supplier of audio chips for the full range of mobile products by Apple (Nasdaq: AAPL  ) has its perks. For one, second-quarter sales jumped 81% year over year and 23% from the previous quarter to $100.6 million. While that was well within management's guidance range between $98 million and $106 million, Wall Street analysts were hoping for more. Likewise, non-GAAP earnings quadrupled year over year to $0.40 per share but still failed to live up to analyst expectations. Cirrus doesn't do earnings guidance, by the way.

Sometimes it doesn't really matter how hard you knock the cover off the ball if the market expected you to absolutely obliterate it. In that light, I don't see today's fall from grace as a sign of weakness; rather, it's a pullback to less insane assumptions and a terrific place to start looking at this stock.

Apple accounts for 44% of Cirrus' revenue by way of those mobile audio chips, but that's changing. CEO Jason Rhode told me all about how the plan always was to land a marquee customer -- and Apple certainly qualifies for that title -- and then build on that relationship to land more contracts. To that end, Cirrus is in talks with several other smartphone designers. Though we don't have any names yet, I would not be surprised at all to see Cirrus chips in coming handsets from rising stars such as HTC and Motorola (NYSE: MOT  ) -- after all, Motorola's claim to fame used to be top-notch sound quality in phones like the RAZR and ROKR, so a return to premium sound chips would make perfect sense.

Third-quarter sales are trending lower because chips destined for this holiday season's gadget gifts were already shipped in the previous quarter. Portable audio chips should continue growing, but chips for products like home speakers should see a pullback. Also, despite earlier rumors to the contrary, Cirrus says that the working relationship with Apple is on good terms. Rhode went so far as to say, "Rumors of our demise have been greatly exaggerated."

Cirrus is trending up sharply in terms of sales, profit margins, return on capital, and more; the profit from audio chips also provides a stable base from which to launch a similar growth track in the market for power controllers. In short, this is a very healthy business and the stock trades at just 10 times forward earnings (though you might expect forward estimates to be trimmed back a bit after today). That's after a 144% return over the past 12 months but a 36% fall from yearly highs. In my eyes, it could be a while before we see a buy-in opportunity like this again -- if ever.

Whether Cirrus is a winner or a loser in your book, the comments box below is waiting to hear all about it.

Fool contributor Anders Bylund doesn't hold a position in any of the companies discussed here. Apple is a Motley Fool Stock Advisor choice. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days.True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. You can check out Anders' holdings and a concise bio if you like, and the Fool is investors writing for investors.

Read/Post Comments (10) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 21, 2010, at 3:52 PM, ziemz wrote:

    100% agree.. They may have missed but if you actually listened or read the conference call you will realize how strong that quarter was. I bought more on this dip as its been oversold just like akamai was when it reported last quarter and a lot of other names.

  • Report this Comment On October 21, 2010, at 8:57 PM, drhjr707 wrote:

    That's all good and well, but from a short term trading perspective, it was bad, plain and simple.

    No fault but my own for the long position, but missing expectations is just that, missing expecations. And we all know the effects that has on a stock post earnings. I got beaten on this one. Long term it may be sound, but for the short term traders, it's now stuck in the mud for the next few days in my opinion.

  • Report this Comment On October 22, 2010, at 1:47 AM, MERCAP wrote:

    Short term or long term... this is a gift from the analysts. No matter where you got in, assuming there's more powder in your pistol (there must ALWAYS be more powder) you go in for more. Where do you find a a company that can beat past performance that was already over the top... analysts who complain about pennies miss the $'s!

  • Report this Comment On October 22, 2010, at 9:02 AM, lmgava wrote:

    @Anders Bylund

    Can you please specify where you heard/read the following bit from ?

    Rhode went so far as to say, "Rumors of our demise have been greatly exaggerated."

    or the other one you cited in your previous article:

    Jason Rhode just told analysts on the earnings call that the business relationship is still "ramping up."

    I listened to the CC, and while the CEO commented on the rumor I didn't heard this exact statement.

    Did you ?

    What I heard was something like that, not word for word but it's accurate:

    "I don't want to comment on what may or my not launch but our position it's in great shape and if you want to buy a stock based on what some blogs says about something maybe written on a taiwanese paper I'm not sure I will help you."

    But I didn't found trace of your statements above.

  • Report this Comment On October 22, 2010, at 9:04 AM, lmgava wrote:

    Sorry for the typo:

    "on what they may or may not launch"

  • Report this Comment On October 22, 2010, at 9:13 AM, analyzer01 wrote:

    Cirrus is a hands down winner. It's the analysts who should get sold. Can you imagine crushing expectations and getting slammed because of pennies miss as determined by analysts? Also, forget all the rumors about Apple. Don't miss the forest for the trees. This is a unique buying opportunity.

  • Report this Comment On October 23, 2010, at 10:39 AM, sap79 wrote:

    Anders Bylund was correct in his article. In regards to Audio, Jason Rhodes said the following.

    “I’m pleased to report we continue to maintain an outstanding relationship with our largest customer and meet their expectations in delivering numerous innovative custom ic’s for multiple high volume applications. Our outlook in this business is stronger than ever and while we generally don’t comment on rumors, I have to say in this case that rumors in our demise have been greatly exaggerated.”

    “In may we announced 2 new smartphone products that have lead to discussions with several tier 1 customers in this space.”

    “I do not want to comment on what may or may not get launched but our position is in great shape. If you are buying and selling stock based on what blogs say about Taiwan press publishes then I’m not sure on how to help you. The outlook for portable audio remains really really good.”

    From what I heard in the conference call the company continues to remain strong and intact with more potential growth. I'm looking forward to seeing how the company performs in the future.

  • Report this Comment On October 24, 2010, at 1:42 PM, lmgava wrote:


    Thank you. For some reason I should have missed that part. I'll try to listen again the CC.

    Is there a transcription available maybe ?

  • Report this Comment On October 24, 2010, at 1:45 PM, lmgava wrote:

    "I must have... "

    lol sorry. My english is not so good.

  • Report this Comment On October 26, 2010, at 11:14 AM, sap79 wrote:

    lmgava, no problem.

    The first part of what Jason Rhodes said was ~13 min into the conference call. It was before the question asking.

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