Shares of Cirrus Logic (CRUS 0.79%) have dipped more than 7% in 2022 so far, despite the company releasing a solid fiscal 2022 third-quarter report on Jan. 31.
Cirrus stock has lost more than 4% of its value since the release of the quarterly report. This seems a tad harsh given that the company's top and bottom lines crushed expectations by a huge margin, and the guidance was way ahead of expectations as well. Not surprisingly, analysts covering Cirrus stock expect it to deliver solid upside.
The stock has a median share price target of $110 and a high estimate of $120, which would translate into a 42% upside from its closing price on Feb. 11. Cirrus stock seems capable of delivering such impressive upside given the pace at which it is growing and the multiple catalysts it is sitting on.
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Cirrus Logic is stepping up its game
Cirrus Logic's fiscal Q3 revenue shot up 13% year over year to $548 million, while adjusted earnings increased 19% to $2.54 per share. The numbers were way better than Wall Street's expectations, as analysts were looking for $2.14 per share in non-GAAP earnings on $510 million in revenue.
The better-than-expected performance wasn't surprising, as supply chain improvements at Apple (AAPL -0.75%) -- Cirrus' largest customer -- had set the chipmaker up for a strong start to 2022. Apple uses Cirrus' power conversion chips and audio codecs in its iPhones, and accounted for 82% of its top line last quarter. The iPhone maker blew past Wall Street's expectations when it released its fiscal 2022 first-quarter results on Jan. 27 on the back of robust demand for its products, and Cirrus followed suit.
Even better, Cirrus' guidance for the current quarter was way better than what analysts were looking for. Cirrus expects $420 million in revenue this quarter at the midpoint of its guidance range, which points toward a massive jump of 43% over the prior-year period's revenue of $294 million. Cirrus says that this huge year-over-year top-line increase would be driven by a combination of higher volumes, an improvement in average selling prices (ASPs), and content gains in the high-performance mixed-signal business, which has been gaining terrific traction of late.
Analysts were looking for just $356 million in revenue from Cirrus this quarter, but it is clear that they underestimated the company's growth drivers. Let's see why Cirrus' growth is about to step on the gas this quarter, and why the company could sustain its newly-found momentum in the long run.
Apple is going to expand the chipmaker's addressable market
It is evident that Cirrus' fortunes are closely tied to Apple, and that's good news for the chipmaker, for two reasons. First, it has gained content at Apple, as the latest generation iPhones come with a power conversion chip from Cirrus in addition to the audio codecs that the latter has historically supplied to the tech titan. This explains why Cirrus management pointed out in the shareholder letter that it is seeing higher ASPs.
The second reason why Cirrus' close Apple relationship bodes well for the chipmaker is because of a potential improvement in iPhone volumes this year. Counterpoint Research estimates that Apple shipped a record 238 million iPhones last year, and it is expected to smash that record in 2022 as per various estimates. Apple's 2022 iPhone shipment estimates range from 259 million units to as high as 300 million units.
Mizuho Securities estimates that the pent-up demand and easing supply chain constraints could lead Apple to make 66 million iPhones in the current quarter that ends in March, an increase of 20% over the year-ago period. So Cirrus' bright forecast seems logical, as higher production at Apple and more content in each iPhone could likely give its revenue and earnings a significant boost.
What's more, Apple's 2022 shipments could hit the higher end of the forecasted range, as the company is reportedly on track to expand its portfolio with a 5G-enabled, entry-level iPhone SE next month. With the device's price expected to range between $269 and $399 as per JPMorgan analysts' estimates (after accounting for trade-ins), the budget-friendly 5G iPhone is expected to give Apple's sales a big boost.
JPMorgan points out that Apple could produce 30 million units of this rumored device in 2022. More importantly, the investment bank estimates that a budget-friendly 5G iPhone could help Apple attract as many as 1.4 billion customers from the Android ecosystem, while also encouraging 300 million existing iPhone users to upgrade.
So Cirrus' chips could be deployed in an additional Apple device that's expected to put up strong volumes. Also, Apple is expected to expand its lineup further next year with a foldable phone, according to noted analyst Ming-Chi Kuo of TF International securities.
Cirrus stock is a terrific bargain
In all, the solid prospects of Cirrus' largest customer should lead to long-term growth and help the semiconductor stock deliver the impressive upside that the market expects it to. Analysts anticipate Cirrus' earnings to increase at an annual rate of 15% for the next five years, which would be a huge improvement compared to a flat earnings performance over the past five.
With the stock trading at just 19 times trailing earnings and 14 times forward earnings, buying Cirrus stock right now is a no-brainer, as it is cheaper than the S&P 500 index and looks primed for substantial upside.
