Cirrus Logic (CRUS 1.18%) has had a mixed 2021. Shares of the company, whose chips are used by Apple (AAPL 0.52%), have appreciated just 11%, underperforming the broader market.
However, Cirrus stock has recently been showing signs of life, gaining 13% in December and looking set to finish the year on a high. The chipmaker's resurgence isn't surprising, as the fortunes of its largest customer have started looking up. Let's look closely at the reasons behind Cirrus' latest rally and see why this tech stock could be headed higher.
Improving iPhone prospects are rubbing off positively on Cirrus Logic
Apple is Cirrus' biggest customer. The iPhone maker produced 80% of Cirrus' revenue in the second quarter of fiscal 2022, driving 34% year-over-year growth in the chipmaker's revenue as it ramped up production of the iPhone 13. Cirrus benefited from an increase in content in the latest iPhone models, as Apple is using the former's power conversion chips in its devices as well this time. This is in addition to the usual audio chips that Apple has been sourcing from Cirrus for well over a decade.
So when news of weakening iPhone 13 demand and Apple's struggles with the supply chain indicated that sales of Cirrus' largest customer could take a hit, there were doubts about whether the chipmaker could sustain its impressive pace of growth. After all, Cirrus reported record revenue for the quarter that ended on Sept. 25, 2021, generating $466 million in revenue and clocking a 44% year-over-year jump in earnings to $1.82 per share.
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The company's outlook, however, was a tad disappointing. Cirrus expects $510 million in revenue this quarter, which would be an increase of just 5% over the prior-year period. But it looks like Cirrus could grow at a faster pace thanks to improvements in Apple's supply chain, which could lead to stronger-than-expected iPhone shipments.
Morgan Stanley analyst Katy Huberty points out that Apple isn't facing the same level of supply level challenges it faced in the quarter that ended in September. As a result, the company could ship 83 million iPhone 13 units in the December quarter, which would exceed earlier estimates by 3 million units.
Given that Cirrus has more content in this year's iPhones and Apple's iPhone shipments are now expected to rise slightly year-over-year, the chipmaker could exceed expectations. More importantly, it looks like Cirrus is on track for a blockbuster 2022, as Taiwanese publication DigiTimes reports that Apple is aiming to increase iPhone shipments by 30% in the first half of 2022. Even better, the tech titan is reportedly looking to hit 300 million in iPhone shipments next year, which would be a nice jump over this year's estimated shipments of 230 million units.
Time to buy
The combination of higher iPhone shipments and Cirrus' higher content in each unit of Apple's smartphones should pave the way for robust revenue and earnings growth, and help the chipmaker exceed Wall Street's expectations. As a result, Cirrus Logic stock seems set for more upside, which is why investors looking to buy a potential growth stock should take a closer look given its attractive valuation.
Cirrus is trading at 19.4 times trailing earnings and 14 times forward earnings, which means that it is way cheaper than the S&P 500's earnings multiple of 34. With the company expected to clock a double-digit annual earnings growth rate for the next five years, investors are getting a good deal on Cirrus shares right now.
