Cirrus Logic is a voice company, making the nuts and bolts for audio signal processing in mobile phones, with its main customer Apple (86% of revenue turnover) being the leader in mobile phone sales.
That’s both great and scary. The relationship has generated over a billion in profit for the company since 2008. However, Apple could start making its own components for the iPhone like it is planning to do with the Mac. An announcement would send Cirrus Logic lower. Apple isn’t the only game in town, however, and the competition is getting thinner. Only Qualcomm has a similar codec product, which consist of an audio codec, plus a digital signal processor and embedded software, but it usually bundles it with an application processor, where Cirrus tailors the audio/voice experience to its customers.
Growth at Cirrus has been extraordinary, with the company going from $182 million in 2008 to $1.56 billion in the last 12 months. This growth has helped it turn profitable and build book value while keeping capex at less than 50% of its net income. Cirrus is also net cash flow positive with $679 million in current assets, including $239 million in cash, and just $282 million in total liabilities and zero long-term debt.
Don’t be fooled by market optimism. Investors have seen a long-term bull run and if you adhere to the philosophy “be greedy when others are fearful and fearful when others are greedy,” then now is the time to be fearful. Picking new stocks for your portfolio has to be tempered with patience, a long-term view and dollar cost averaging when necessary. Stock selection is always important, but given a five- or 10-year time horizon, some years are going to produce poor results. Why should investors be willing to invest into the S&P 500 at regular intervals, but not do the same across individual stocks?
Cirrus Logic is down close to 50% from last year’s high of $71.97, with weakness in smartphone demand through 2017 and a reduction in average sales prices at Android customers. However, the company’s relationship with Apple is still strong, with design activity continuing on numerous products.
While I think that Cirrus Logic will continue to play an important role in mobile devices going forward, the stock is pretty volatile, and would likely be subjected to further declines in a market correction.
Over the next two years, Cirrus is looking to earn $8.25 a share, which will bring its book value over $26. New tax laws will help every American company, and with Cirrus trading below historic and industry averages, most of the fear is priced in. Any multiple expansion will send the stock back up. In addition, if the company can keep its top customer, the chances are good it will keep growing as well.
Disclosure: I am not long/short Cirrus Logic, but may write puts on Cirrus Logic in the next 72 hours.
