Bear Of The Day: Cirrus Logic

| About: Cirrus Logic, (CRUS)
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You'll often hear about "derivative" trades or alternative ways that traders are taking advantage of a hot sector or new technology without investing directly in the business itself, which might be overbought or played out. Investors will sometimes look to related companies that have yet to be recognized by the masses or have not yet fully profited from a breakthrough technology.

When the Internet was gaining popularity in the 1990s, hundreds of companies were riding the wave of this new shift in the way we interacted. The Internet was not just a new cool technology, it changed the way we lived and it had (has) the ability to act as an extremely powerful catalyst for all sorts of growth. There were some internet derivative trades that worked exceptionally well: Google (NASDAQ:GOOG), IBM (NYSE:IBM), Rackspace Hosting (NYSE:RAX) and more.

But today's bear of the day isn't an unrecognized company that is on the cutting edge of technology or on the precipice of meteoric growth; it's a seasoned "old tech" company that is hanging on to another mature tech giant to generate the majority of its income.

The Ties That Bind

Cirrus Logic (NASDAQ:CRUS) generates a great deal of their total revenue from one client, Apple (NASDAQ:AAPL) -- almost 90%, according to several sources. The company supplies Apple with audio chips for its mobile devices. While it seems like a good deal to be in bed with one of the best and brightest companies out there, the relationship has its issues. And Apple can not only have what it wants from Cirrus, but at just about any reasonable price.

With Apple's brand strength waning and companies like Samsung (OTC:SSNLF) and BlackBerry (BBRY) nipping at their heels, Apple not only needs to fight for market share, but keep costs down as the average selling price for smartphones has been on the decline. Cirrus' margins have been suffering of late and its shares have tumbled from over $45 just 10 months ago to their current value just above $18. The company recently warned that lower product sales forecasts from an "unnamed" customer are going to hurt its future earnings.

Not a good sign...


Cirrus is making some strides in broadening its customer base and product mix, but it has to watch its cash and its limited resources in addition to keeping its biggest client happy. As a Zacks Rank No. 5 (strong sell), it hasn't been pleasing analysts or shareholders. While the P/E multiple seems attractive at 10.15 times forward earnings, one has to wonder just how bad earnings can get.

Analysts have been slashing their forecasts, and the stock currently has a negative 23% ESP (expected surprise prediction) for the coming quarter's earnings. This negative ESP, combined with the Zacks Rank of 5, makes for a high probability of a miss. I think there is a future for Cirrus, but unless Apple's new iPhone wows crowds and blows the ever increasing competition away, Apple -- and Cirrus along with it -- may have a long road to recovery.

If you are looking for a chipmaker or want to play on the smartphone revolution, check out OmniVision Technologies (NASDAQ:OVTI) with a Zacks Rank of 1 or even Qualcomm (NASDAQ:QCOM) with a Zacks Rank of 3.

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