Apple (AAPL -0.54%) supplier Cirrus Logic (CRUS -1.14%) is set to release its third-quarter results on Jan. 28, and it looks like there is some optimism building around the stock. Short interest is probably declining as Apple's deal with China Mobile (CHL) is expected to give Cirrus a shot in the arm. Also, Cirrus' diversification into newer areas gives bulls more reasons to cheer, who expect this dirt cheap stock with a trailing P/E ratio of less than 10 to become an out-performer in 2014.
However, would you like to put your money into a company whose earnings are expected to decline at a CAGR of 31.60% over the next five years? Cirrus might see a spike if it manages to post decent results and offer a better outlook, but it is far from being a long-term buy at the moment.
Dialog: Not the right benchmark
In his pre-earnings analysis, Fool contributor Hugo St. John, III, argued that a drop in Cirrus' short interest could be the result of a robust performance from Dialog Semiconductor. Dialog derives around 70% of its revenue from Apple, which makes it similar to Cirrus, which generates more than 80% of its revenue from the smartphone behemoth.
Dialog recently updated its expectations for the fourth quarter. The company expects revenue to increase 31% year-over-year on the back of strong sales in mobile systems during December. Now, this looks like a positive sign for Cirrus going into earnings, but analysts expect otherwise. Cirrus' revenue is expected to decline 31% year-over-year in the quarter that ended in December, while earnings per share are expected to drop to $0.77 from $1.64 per share in the year-ago period.
More trouble ahead?
Cirrus has been a risky play due to its over-reliance on Apple for revenue. Recently, it was revealed that it had lost the audio amplifier slot in the iPad Air to Maxim Integrated Products. Since then, it has been all downhill for Cirrus, making it look more like a value trap than a value play. In addition, surging sales at Dialog should be taken with a grain of salt, as it is a Cirrus competitor.
Dialog supplies power management chips to Apple for the iPhone, but it also makes audio codecs. Now, Cirrus is also known for supplying audio codecs to Apple, which is why soaring sales at its competitor should not be taken as an encouraging sign. Barclays' analyst Blayne Curtis doesn't rule out the possibility of Apple taking away all amplifier spots from Cirrus, and this would mean an annual revenue loss of $150 million -- or around 20% of the top line.
China Mobile might not be a big tailwind
In addition, Apple's deal with China Mobile might not have a very big impact on Cirrus' results. According to analysts, iPhone sales were already expected to come in at 54 million units in the previous quarter, but since Cirrus has probably failed to increase its content at Apple, it isn't in a position to enjoy solid growth from this account. Also, the fact that Apple might be negotiating lower prices for Cirrus' solutions could be another headwind.
Despite analysts at ZDNet expecting the China Mobile deal to add 15 million-20 million units to Apple's sales, Cirrus investors shouldn't get too euphoric. Moreover, Cirrus' diversification initiatives, such as energy products and LED drivers, haven't taken off yet. The commoditized nature of the LED business means that Cirrus could end up facing troubles similar to its audio amplifier business.
The bottom line
All being said, investors should still stay away from Cirrus, despite its cheap valuation and optimism going into the earnings, as it could turn out to be a dead money investment.
