Why Cirrus Logic Will Survive And Thrive By Swimming Next To Apple

| About: Cirrus Logic, (CRUS)

Nowadays, the theory of evolution has become fairly widely accepted, so much so that we apply it to things not necessarily attributable to Nature. Media articles borrow this language when analyzing the way companies change with time, implicitly asserting that companies are organic, living, breathing entities. We read and talk about things like the evolution of the business world in general, down to the minutiae concerned with the evolution of specific product lines.

Unfortunately, some analysts demand that evolution be the defining factor that determines whether a company has successfully navigated the nuances and dangers inherent within the vertical / industry it sits in. This thought process appears to have contributed to the precipitous drop associated with Cirrus Logic's (NASDAQ:CRUS) latest quarterly earnings announcement. On a day in which CRUS announced to the market its successful earnings, Mr. Market responded with almost six times (6x) the average daily volume in activity, while burning the stock almost 14% in one day.

To review, in its latest quarterly results, CRUS performed admirably across several metrics. As others have pointed out: CRUS outperformed the industry average in terms of its year-over-year (yoy) revenue growth by 6.3x (54% vs. 9% growth); CRUS also has a higher ROE relative to its industry peers; CRUS has zero debt to speak of while maintaining a solid, positive cash flow; and CRUS has shown a strong history recently in terms of maintaining significant earnings per share.

What we should also take note of is the way in which CRUS, over the past eight quarters, has outperformed analysts' consensus EPS every time but once. (In FQ2 2012, CRUS "simply" met expectations.) When you add it all up, this translates to an average EPS beat of 11.4% every quarter for the past two years. As one can tell, this does not speak to a company who has no future, nor does this speak to a company who is drifting listlessly one way or the other. CRUS represents a company who remains galvanized around its purpose of developing best-in-class products, and then delivering these products to the market in a targeted, well-conceived-of manner.

Now, let's not forget--we still have those analysts who think the defining point about CRUS is that CRUS has not evolved (i.e., diversified) its customer base, thereby spreading risk across multiple sources of revenue. However, these analysts--at the very least--grossly misinterpret CRUS's strategy here. As previously stated, CRUS has taken a very defined stance when it comes to who it aims to serve and how. Namely, CRUS invests heavily into R&D such that it can continually add, incrementally, to its patent portfolio with regards to audio, and even energy, all the while maintaining a best-in-class status that then translates to preferred relationships with important players. As many analysts correctly identify, the primary revenue stream for CRUS is Apple (NASDAQ:AAPL). However, if you listened to the latest earnings call, CRUS has purposefully done this because it knows the way AAPL operates in terms of exclusivity of content (i.e., AAPL enjoys knowing it has proprietary status when it comes to major components of its hardware). I did happen to dial-in, but the transcript will read just the same: CRUS wishes to develop exclusive relationships with customers who it knows will come to rely solely on them because CRUS has the best-in-class technology that CRUS will then develop specially for that customer's needs. If you can afford it, and if you've had it before, that's what we call white-glove service, folks.

As such, if you're only worried about CRUS evolving its customer relationships, I would argue this does not necessarily require diversification of your customer base. If you look at evolution, Nature provides multiple examples in which exclusivity, not diversification, is the name of the game. In fact, considering how much of a behemoth AAPL is, one can easily relate this symbiotic / mutualistic relationship between CRUS and AAPL to that of a pilotfish and a shark: CRUS swims closely to AAPL because it knows it can "feed" much more easily, while AAPL needs CRUS to live side-by-side because otherwise AAPL would be required to seek out new partners, so-to-speak, to help it maintain its edge at the top of the food chain. (If this doesn't immediately speak to you, just know that pilotfish help keep sharks healthy, in general, which keeps sharks alive and well so they can keep doing what they do.) Please note, this does not mean CRUS should not diversify itself at all. In fact, CRUS has started this process, and it likely has already made significant in-roads with what many deem the Apple of China.

In short, as Shakespeare noted, "Uneasy lies the head that wears a crown"; I'm certain AAPL feels the enormity of this weight as it continually struggles from its leaderboard position against competitors, IP infringements, and the like. As others have noted, there's only one way to go when you're at the top, so it's good to have friends to help you stay there. That's what CRUS and AAPL have got going for themselves, and this should not be discounted by investors--it should be celebrated until we hear otherwise.

Now, go watch some Planet Earth, or maybe Shark Week / Sharkfest re-runs.

Disclosure: I am long CRUS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.