The signs were ominous. There was a chance that Apple (AAPL 0.05%) supplier Cirrus Logic (CRUS -1.31%) might be losing business from Cupertino. The suspicion was confirmed when a recent teardown of the iPad Air by Chipworks revealed that Cirrus has lost the audio amplifier slot to Maxim Integrated Products.
Fool contributor Hugo St. John III is of the opinion that "Cirrus had "only" lost the audio amplifier socket in the latest iPad Air. "This represents, perhaps, a $20 million loss annually -- small potatoes for a company with over $800 million in revenue per year." In comparison, Barclays' analyst Blayne Curtis estimates a loss of as much as $40 million per year. But irrespective of the estimate, this could be a sign of worse things to come as Cirrus' growth is almost dead.
Falling from grace
After having a great time in 2012, Cirrus' revenue growth has fallen off a cliff, quite literally, as you can see below. Its stock has also dropped massively after peaking in the mid-$40s in September of last year. As a result, Cirrus is pretty cheap at 9 times trailing earnings. But does this make it a value play, or a value trap?
Cirrus Logic revenue data by YCharts.
Going by analyst estimates on Yahoo! Finance, a cheap P/E ratio doesn't make Cirrus a buy. Its revenue is expected to drop almost 10% in fiscal 2014, and grow just 3% in fiscal 2015. In addition, earnings are expected to decline at a rate of almost 32% a year for the next five years. After taking a look at these estimates, Cirrus indeed looks like a value trap.
What next?
With 82% of revenue coming from Apple in the previous fiscal year, the loss of the amplifier spot in the iPad Air, and possibly the iPad Mini retina is a big deal. The lack of diversification looks set to hurt Cirrus until it finds strong alternatives. Currently, Cirrus is focusing on energy products and is manufacturing light-emitting diode (LED) drivers.
This could turn out to be a good bet in the future, as the LED lighting market is expected to be hot. According to McKinsey, the LED lighting market is expected to grow at a CAGR of 34% till 2016, followed by 13% through 2020. By 2020, the size of this market is expected to reach $94 billion, so Cirrus indeed has a good opportunity if it executes well.
However, recent results in Cirrus' energy business -- which accounts for less than 6% of overall revenue -- haven't been encouraging. Revenue from this segment was down almost 33% year over year. So, Cirrus' quest for diversification through its energy business isn't gaining much traction.
In addition, due to the commoditized nature of the LED lighting business, Cirrus might face pricing pressures from other players. In fact, the company lost the audio amplifier slot to Maxim since the chip is a commodity, unlike audio codecs that are custom-made for Apple.
No more an Apple play?
Considering that 82% of revenue comes from Apple, Cirrus doesn't have a lot of room to grow its Apple account. As such, there's the risk of Cirrus getting stagnant, which has already started happening. This is evident from the fact that Cirrus is seeing year-over-year drops in sales at a time when sales of the iPhone are expected to cross 50 million units in the ongoing quarter.
Canaccord Genuity analyst Michael Walkley recently bumped up his iPhone sales forecast for the ongoing quarter to 54 million units from the previous 52 million. The iPhone 5s is the top-selling iPhone at all four major wireless carriers in the U.S., while the cheaper 5c is in fourth place. Thus, it is pretty clear that Cirrus is not expected to benefit much from the robust sales of the iPhone.
On the other hand, iPad sales are expected to rise 8% to 24.8 million, according to Walkley. But, even if Cirrus had managed to keep its amplifier spot in the iPads this time around, there might not have been much of a difference to its top line.
Barclays' analyst Blayne Curtis has spookier news in store for Cirrus investors. Curtis believes there is a possibility of Apple taking away all of its amplifier spots away from Cirrus, which means that it could even lose the iPhone slot. This is expected to result in an annual revenue loss of $150 million for Cirrus -- around 20% of its top line.
The bottom line
The future for Cirrus Logic is hazy at best. The negatives outweigh the positives by a wide margin, which is why Cirrus looks more like a value trap than a value play. As such, investors should consider staying away from Cirrus even though the stock is trading at dirt cheap levels. There appears to be a very real possibility that there could be more downside going forward.
