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Cirrus Logic: Avoid This Value Trap

By Harsh Chauhan - Sep 6, 2018 at 8:32PM

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This chipmaker still has a big problem.

Rumors that Cirrus Logic (CRUS -1.75%) scored a new contract at Apple (AAPL -5.64%) to supply noise-canceling chips for the next-generation AirPods breathed life into the stock in July. But Cirrus sank hopes of a turnaround just a few days later when it released its first-quarter report.

The audio-chip specialist's revenue and earnings plunged, and the company made it clear that there would be no turnaround this fiscal year. Instead, Cirrus wants investors to remain patient, as the arrival of new products and a wider customer base are expected to help it make a comeback a year from now. But is it worth it to wait for a turnaround?

Money set as bait in a bear trap.

Image Source: Getty Images.

The case for Cirrus

Cirrus looks like a very reasonable bet right now. Its price-to-earnings (P/E) ratio of nearly 24 is right in line with the industry average, while the forward P/E ratio of 15 indicates that the market is anticipating bottom-line growth over the next year.

What's more, Cirrus has a pristine balance sheet with no debt and more than $225 million in cash. So the company might look like a value investor's dream at first, especially if it can deliver on its promise of turning around. Additionally, Wall Street seems to concur with management's promise that a turnaround will eventually arrive. Estimates compiled by Yahoo! Finance are that the chipmaker's earnings will increase at a compound annual growth rate of 15% for the next five years, which is well ahead of the 6% annual growth it has clocked in the last five.

But this will be easier said than done, as Cirrus' best efforts to diversify its business have fallen flat time and again.

The big problem

Cirrus has failed to get away from Apple, which still supplies 76% of its revenue, despite boosting spending in a bid to diversify its customer base and attacking new markets.

Metric Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 Q1 FY19
Quarterly revenue (in millions) $232 $259 $429 $523 $328 $321 $426 $483 $303 $254
Quarterly operating expenses (in millions) $93 $104 $108 $109 $119 $114 $120 $131 $132 $131
Revenue from Apple (% of total revenue) 62% 68% 78% 85% 79% 76% 82% 86% 79% 76%

Data Source: Cirrus Logic quarterly reports.

Clearly, Cirrus' top line has taken a massive hit as iPhone unit sales have stagnated. What's more, the chipmaker's failure to score new business within Apple's ecosystem means that too much reliance on Cupertino is now more of a liability. But what's most alarming is that Cirrus's ramped-up spending on research, development, and marketing isn't taking it anywhere.

The company has been talking about the opportunity in digital headsets and voice biometrics for a long time now, but those two markets haven't led to meaningful gains for the company.

The cost of accessories such as headsets is much lower than a smartphone, which means that the revenue opportunity won't be as big. For instance, even if Cirrus ends up supplying chips for Apple's next-generation AirPods, the increase in the revenue would amount to just $50 million, according to one analyst. That isn't enough to move the needle, so the only way Cirrus could make a meaningful comeback is by supplying its audio chips to Android smartphone OEMs (original equipment manufacturers).

Cirrus is hopeful that it will land more design wins and get additional content in Android smartphones, but history speaks otherwise. Samsung has been Cirrus' second-largest customer, but this account hasn't impacted the company's finances in a meaningful way. Again, management recently claimed that "several OEMs launched new smartphones and wireless headset products to utilize our technology," but analysts expect revenue to fall 22% this quarter.

Investors should steer clear of Cirrus Logic until it can show that Android smartphone makers are using its chips in higher volumes, reducing Apple's sway on its top line.

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Cirrus Logic, Inc. Stock Quote
Cirrus Logic, Inc.
$79.86 (-1.75%) $-1.42
Apple Inc. Stock Quote
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