Cirrus Logic (CRUS), the audio chip supplier has seen ups and downs in its share price over the past six months, however, its share price has been seeing an upward trend for the past two months and investors seem positive that the stock will remain on the uphill climb in the weeks to come too. The recent guidance released by competitor Avago estimated higher revenues and earnings for the next financial period, and that demand for its products would see a rise soon, pertaining to the launch of new and refreshed products by Apple (AAPL). Investors' confidence in the company has thus been reinforced and forced the stock price to rise. Whether investors' expectations are justified or inflated depends on a number of factors that will be discussed below.
Cirrus Logic is a Texas based American semiconductor supplier (fabless) that supplies analogue and digital audio signal processors that are employed in a number of audio related equipment and electronics such as smartphones, tablets, portable music devices, televisions, home theatre systems, and car stereo systems, among others. Moreover, its analogue mixed-signal converters are also employed in energy related equipment, LED controllers, and energy measurement chips used in digital utility meters such as electricity meters. The company is widely famous for being the audio chip supplier to Apple.
Cirrus Logic in the market today
The stock is currently trading with a P/E of 10.91x of its last twelve months' earnings, while 13.53x of its annual future earnings projected for the next year, with a current market capitalization of $1.54 billion. The current stock valuation suggests that the stock is undervalued and the investors are actually paying less for the earnings that the company is generating currently, and is expected to generate in the future.
Cirrus Logic has seen its revenues growing at a sturdy 90% over the past one year, as well as its earnings increasing to $136 million in the 2013 from $87.9 million in 2012. The company's balance sheet boasts a good cash position, and its current assets have seen a healthy growth over the past two years. However, the company's revenues have seen a 25% quarter-over-quarter decline in the first quarter of the new fiscal year. Also, the company witnessed a 5% decline in EPS, reducing to $0.56 per share from an EPS of $0.59 over the same period, although beating an EPS consensus of $0.49 per share. However, its EPS has seen a rise of 154% year-over-year from $0.22 per share in Q1 of 2012, to $0.56 to Q1 of 2013, which shows a great deal earnings growth for the company.
Cirrus Logic's customer base
Cirrus supplies analogue and digital signal processing components to a number of OEMs producing smartphones, tablets, televisions, home theatre systems, car audio systems, portable music devices, among a number of other audio electronics. Cirrus supplies to a over 2500 companies all over the world in different markets, including renowned companies such as Samsung, Sony, Philips, and LG, however, its major customer is Apple, which comprises 82% of its sales by value.
Being a major customer of Cirrus Logic, and making up a huge part of the company's revenues, Cirrus's earnings and performance is immensely dependent on Apple . How Apple's products perform in the market directly affects Cirrus Logic's sales and thus earnings. Since Apple is a strong company with a strong customer base itself, thus it serves Cirrus good. However, as much as this is a strength for Cirrus, it also adds a lot to the risk associated with the company. With such a large chunk of sales tied to one company, any negative reaction to Apple's products would directly affect Cirrus Logic and its earnings, and consequently its stock price. Cirrus's customers thus lack diversification, making investing in the company all the more risky.
However, so far Apple has not proved to be a bad choice for a business-to-business relation, since Apple's products have seldom seen the downside of the market, thanks to its loyal customer base, which has proved to be of enormous benefit for Cirrus. Also, the portion of Cirrus's non-Apple customers have proved to be yielding quite stable earnings for the company, thus being a safe base for Cirrus. Before Cirrus got into a contract with Apple in 2009, the company's revenues showed a pretty flat trend for the preceding five years, or in other words, a negligible growth rate, also showing minimal risk involved with the companies. However, 2009 onwards since Cirrus was selected to provide audio components for Apple's iPod, the company's revenues have experienced a steep uphill climb, thus proving Apple to be a growth factor for Cirrus.
A recent decline that the company's stock has witnessed can mainly be attributed to Apple's own slow growth of revenues due to a decline in sales growth preceding the launching of newer products by Apple. The market is nevertheless hopeful that the launch of the new iPhone 5S as well as the cheaper iPhone that people are calling iPhone 5C, will again take the company higher on the stock exchange, as more sales for Apple mean more sales for Cirrus.
What is more is that Apple is counting on a possible deal with China Mobile (CHL) involving its iPhone 5C, which would help Apple to open up to the Chinese market, which has largely remained untapped due to the premium prices of the iPhone series. Apple, and thus Cirrus expects larger sales once the deal with China Mobile is secured. The iPhone 5C would also help Apple reach into the huge emerging markets of the world, which has largely remained unable to buy the iPhone due to its high prices.
Apple is also expected to refresh its iPad soon, which would also be another sales booster for the company. In addition to that, Apple's iTV could also prove to be a huge sales generator for Cirrus.
The market performance of Cirrus is usually linked to the performance of Apple. This makes it prudent to compare the fundamentals and market performance of the two companies. SA author Matthew Frankel has already given a pretty good overview of the fundamental relationship between the companies. The table below focus more one changes in market performance of Cirrus due to Apple launches.
15 days before launch
date of launch
a month after launch
As evident from the data given above, the result of Apple's iPhone launch has a major effect on the share price of Cirrus Logic. In the recent years, the iPhone has been a major factor for driving up the price of the Cirrus Logic's stock, apart from the launch of iPhone 5S. Since Apple is Cirrus Logic's biggest customer, generating a major chunk of Cirrus's revenues, its product launches and other major events have a major effect on Cirrus's share price. Investors can play with this information using their own expectations from the impending launch of iPhone. This volatility also offers a good chance for options play.
All factors considered, Cirrus's stock seems a good buy since its stock is not Apple dependent only, but is also backed by strong financials. Cirrus Logic's stock price is expected to rise following the official announcement of Apple's new iPhone expected to be made on September 10th. Moreover, the company's P/E and PEG ratio reinforce investor belief that the company's stock would see growth in the future. Cirrus Logic is thus a good long term investment and interesting way to play the approaching Apple launch.