Cirrus Logic: Avoid This Value Trap
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Rumors that Cirrus Logic (NASDAQ: CRUS) scored a new contract at Apple (NASDAQ: AAPL) to supply noise-canceling chips for the next-generation AirPods breathed life into the stock in July. But Cirrus sank hopes of a turnaround just a few days later when it released its first-quarter report.
The audio-chip specialist's revenue and earnings plunged, and the company made it clear that there would be no turnaround this fiscal year. Instead, Cirrus wants investors to remain patient, as the arrival of new products and a wider customer base are expected to help it make a comeback a year from now. But is it worth it to wait for a turnaround?
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The case for Cirrus
Cirrus looks like a very reasonable bet right now. Its price-to-earnings (P/E) ratio of nearly 24 is right in line with the industry average, while the forward P/E ratio of 15 indicates that the market is anticipating bottom-line growth over the next year.
What's more, Cirrus has a pristine balance sheet with no debt and more than $225 million in cash. So the company might look like a value investor's dream at first, especially if it can deliver on its promise of turning around. Additionally, Wall Street seems to concur with management's promise that a turnaround will eventually arrive. Estimates compiled by Yahoo! Finance are that the chipmaker's earnings will increase at a compound annual growth rate of 15% for the next five years, which is well ahead of the 6% annual growth it has clocked in the last five.
But this will be easier said than done, as Cirrus' best efforts to diversify its business have fallen flat time and again.
The big problem
Cirrus has failed to get away from Apple, which still supplies 76% of its revenue, despite boosting spending in a bid to diversify its customer base and attacking new markets.
| Metric | Q4 FY16 | Q1 FY17 | Q2 FY17 | Q3 FY17 | Q4 FY17 | Q1 FY18 | Q2 FY18 | Q3 FY18 | Q4 FY18 | Q1 FY19 |
|---|---|---|---|---|---|---|---|---|---|---|
| Quarterly revenue (in millions) | $232 | $259 | $429 | $523 | $328 | $321 | $426 | $483 | $303 | $254 |
| Quarterly operating expenses (in millions) | $93 | $104 | $108 | $109 | $119 | $114 | $120 | $131 | $132 | $131 |
| Revenue from Apple (% of total revenue) | 62% | 68% | 78% | 85% | 79% | 76% | 82% | 86% | 79% | 76% |
Data Source: Cirrus Logic quarterly reports.
Clearly, Cirrus' top line has taken a massive hit as iPhone unit sales have stagnated. What's more, the chipmaker's failure to score new business within Apple's ecosystem means that too much reliance on Cupertino is now more of a liability. But what's most alarming is that Cirrus's ramped-up spending on research, development, and marketing isn't taking it anywhere.