Cirrus Logic (CRUS) share price is taking a beating, as the company had to drastically lower its latest margins estimates from a range of 50 percent to 52 percent, down to the mid 40s over the long term, at the Barclays Global Technology Conference.
The major reason for the downturn is the overwhelming reliance of Cirrus upon the performance of Apple (AAPL). As Apple's performance goes, so goes Cirrus' performance.
At this time Apple accounts for about 85 percent of sales at Cirrus. Some even suggest that's a big positive because sales reliant upon Apple previously stood at 91 percent.
However it may be spun, this is a game-changing disaster for Cirrus, and the share price of the stock will suffer some pain; both now and going forward.
The Apple Effect
What is challenging for Cirrus with the Apple effect is the fact Apple itself has been under enormous pressure to break from its past strategy of not sacrificing margins.
Competition is now forcing Apple to change its strategy, and a lower priced iPhone is reputed to be in the works, and which could be released later in the year, or early 2014. That would be directed towards emerging markets.
The problem is Cirrus, which makes audio components for mobile devices, is going to participate significantly in that downward pricing pressure, as it has participated in the disappointing sales of Apple smartphones.
Most of us know this already, but what is new is the fact the margin levels are falling far faster than expected, which will punish the share price of the company.
Cirrus and Diversification
Cirrus is working on diversifying away from Apple, but as the numbers mentioned earlier show, it's a very slow process, and since the company is so reliant on Apple for revenue and earnings, it can't do it in a way that undercuts its exposure to Apple.
The company is taking the right steps, albeit way too late, and there is not much it can do other than develop products that competing mobile phone manufacturers can use. Over the very long term that could help Cirrus, as voice is one of the more valuable features of a phone, and doing it well will also have a market.
That said, it could take several years for Cirrus to rebalance in a way it finds predictable support.
Catalysts and Long-Term Outlook
I think Oppenheimer analyst Rick Schafer has it right when he wrote in a note to clients that the position held by Cirrus is "increasingly precarious." The numerous pressures from Apple being applied to the company, along with the lack of any short- or mid-term catalysts, will make it a win if the company can just tread water.
Consequently, expectations are Cirrus should report a string of weak quarters into the future, and barring some temporary outperformance, it will continue to weigh on the share price of the company. Cirrus confirms pricing pressure in the smartphone market will continue on. Prices for its products will also continue to shrink, the company said.
How quickly things have changed for Cirrus Logic, as in one short month the outlook for gross margins fell by about 6 percent. What is particularly troubling about that is why they missed by so much in the quarterly report. The company had to have an idea of the possibility, or was far too optimistic in the support from Apple.
Cirrus has to know Apple is going to feverishly work to lower prices on its products as its competition continues to cut into smartphone sales. I would expect that to continue, no matter how many smartphones Apple sales. That means earnings per share and other metrics are going to drop as well, which will further pressure the share price of Cirrus.
Cirrus Logic is in big trouble. While the company says it should be able to grow revenue at a 15 percent annual rate in the years ahead, that remains to be seen. But even if it does, the pressure on margins is not going to let up any time in the near future.
Diversification away from Apple will take a long time, and won't have much of an impact for some time. While that's happening, the pressure will continue on Cirrus from Apple to lower prices.
Add to that there being no catalysts to overcome the faltering scenario, and this looks like a company that has nowhere to go but down with its share price.