Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

This Apple Supplier Could Give Investors a Hard Time This Month

By Harsh Chauhan - Updated Apr 23, 2019 at 4:59PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Cirrus Logic stock looks set to take a hit. Can the company's diversification efforts save it?

Apple ( AAPL 1.60% ) supplier stocks have been in the hot seat over the past few months thanks to speculation about weak demand for the latest iPhones. Now that Cupertino has confirmed that the rumors are true and its sales will decline on an annual basis for the December-ended quarter, Apple supplier stocks are in for a rough ride this earnings season.

Cirrus Logic ( CRUS 0.68% ) could be a major casualty of Apple's problems because it relies on the iPhone maker for a whopping 82% of its total revenue. The audio chip specialist is set to release its fiscal third-quarter results on Jan. 30. Investors should brace for a hard landing.

A young woman leans her elbows on her desk, her head in her hands.

Image source: Getty Images.

Brace for impact

Cirrus Logic's earnings are expected to drop by almost half year over year to $0.80 per share, thanks to an expected 33% decline in revenue to $320 million at the midpoint of company guidance. The company slashed its third-quarter sales guidance to a range of $300 million to $340 million in early December, down from the prior revenue forecast of $360 million to $400 million.

Investors shouldn't expect any turnaround in the fourth-quarter forecast, as supply chain reports suggest that iPhone production could decline substantially over the January-March period. Supply chain sources tapped by the Nikkei Asian Review suggest that iPhone production during the first quarter of calendar 2019 could be reduced to 40 million-43 million units, down from the prior estimate of 47 million-48 million units.

The midpoint of that production forecast indicates that Apple's iPhone sales could drop around 20% from the 52.2 million units that it had shipped in the year-ago quarter. It is always a good idea to take these production estimates with a grain of salt because they don't come straight from Apple, but they do provide an indication of the hit that a supplier like Cirrus Logic could take.

Analysts are already predicting a year-over-year drop in fourth-quarter revenue, but if Cirrus' guidance for the quarter is even worse than analysts are predicting, it could have a negative impact on the stock. The stock is already trading close to its 52-week low after losing 30% of its value over the past year and is lacking catalysts. Things look bleak for Cirrus going into its first earnings report of the year.

Can Cirrus spring a surprise?

Cirrus positively surprised investors back in October by exceeding Wall Street's sales and earnings forecasts by a wide margin, but that beat was driven by a shift in revenue from the third into the second quarter. It is unlikely that the company will have a similar tailwind this time around.

Cirrus investors, however, will be paying close attention to what management has to say about the non-Apple business. The company is confident of recording top-line growth in the fiscal year that begins in April, and for that to happen, its design wins with Android smartphone makers will have to start paying off.

Cirrus seems to have made some progress on this front, as it recently started shipping its chips for a flagship Android customer in North America. The company was also excited about expanding its footprint at a large Android original equipment manufacturer to which it is now supplying chips for multiple models.

As management said in November, Cirrus also expects "additional flagship devices utilizing our technology to launch over the next six months." However, if these contracts aren't big enough to mitigate the iPhone slowdown, Cirrus investors can expect further stock price erosion.

Check out the latest Cirrus Logic earnings call transcript.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cirrus Logic, Inc. Stock Quote
Cirrus Logic, Inc.
CRUS
$86.89 (0.68%) $0.58
Apple Inc. Stock Quote
Apple Inc.
AAPL
$173.92 (1.60%) $2.74

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
652%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/08/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.