As the resident Apple (AAPL 4.08%) permabull, I've always been on the lookout for derivative component plays. The smartphone and mobile revolution has been one of the most powerful storylines over the past couple years, particularly after Apple revolutionized the industry in 2007.
A long and winding road
This search is why I'd previously invested in ARM Holdings (ARMH), only to sell (prematurely in hindsight) due to concerns about monetization. I had doubts that ARM's role in the value chain was as envious as I initially thought, and subsequently redeployed my investing dollars into Qualcomm (QCOM 3.65%), an ARM licensee with a stranglehold on licensing, cellular basebands, and mobile applications processors (three for the price of one!). Qualcomm also has deep ties with Samsung, giving it exposure to the top smartphone makers in the world. No regrets there so far.
Once upon a time, I was also an OmniVision (NASDAQ: OVTI) bull, thinking the image sensor specialist's lead in backside-illuminated technology gave it a substantial leg up against the competition. When OmniVision lost the iPhone 4S primary camera spot to Sony, that was just the first sign that things may never be the same. The company subsequently lost the iPhone 5 primary sensor, also to Sony. HTC has gone with STMicroelectronics for the "UltraPixel" sensor in its One flagship (OmniVision sources the secondary sensor), which lends to the idea that BSI sensors are becoming commoditized. Goodbye, pricing power. I gave up on OmniVision long ago.
Throughout this whole time, Cirrus Logic (CRUS 2.35%) has been on my radar as the primary supplier of audio codec chips in iDevices, with Apple comprising 91% of sales in the December quarter. I've never invested in the company, primarily due to a feeling that I'd missed the boat already. Shares topped out over $45 late last year, making me think Cirrus would always be the one that got away.
The company released preliminary results last night, and Cirrus expects revenue to come in below consensus. The $206.9 million in estimated sales are shy of the $210.2 million that the Street was modeling for, and the company is preparing to eat an inventory writedown that could be as high as $23.3 million.
That's how much of a net inventory reserve Cirrus is recording, which is a preliminary and high-end estimate of how bad the damage could be. Gross margin will get crushed as a result, since inventory reserves are included in cost of goods sold.
Still, these are short-term blips, and the business should recover as Cirrus progresses through the year. Gross margin is expected to immediately recover to 50% to 52% in the June quarter, with sales of $150 million to $170 million. That revenue guidance for next quarter represents 62% growth at the midpoint compared to the $99 million in revenue posted last time around.
Meanwhile, the company may be capturing even more content in iDevices. Recently public rival Audience got clobbered last year when it disclosed its earSmart technology wouldn't be integrated into upcoming iPhones, leading fellow Fool Eric Bleeker, CFA, to think that Cirrus swooped in for the win.
Cirrus is hitting fresh 52-week lows today on its release, which at long last gives me the buying opportunity I've been waiting for. At less than eight times earnings, I can't resist any longer. This time next week, after clearing our trading restrictions, I plan on buying in to Cirrus Logic. Finally.