Investors Beware: One Trick Pony Stocks Ahead
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There’s a reason that future business managers and CEOs are taught the virtue of diversification. Offering a variety of products to a roster of clients maximizes profit potential and provides revenue insulation should a company lose customers. Unfortunately, this lesson can be forgotten when your biggest client is a major market mover and a primary source of revenue.
Cirrus Logic (NASDAQ: CRUS) supplies chips that are used in Apple’s (NASDAQ: AAPL) smartphones and iPads. How many chips? Enough chip sales to help propel the stock price up 132% year to date. Revenue increased from $369.9 million in fiscal year 2011 to $426.8 million in 2012. And Apple sales were responsible for 47% of Cirrus’ revenue in 2011 and a whopping 62%, or $264.4 million, in 2012.
Analysts are predicting Apple’s new iPhone 5 will sell over 10 million units this month and every one of them will contain Cirrus chips. Cirrus’ September quarterly revenue is expected to reach $173.19 million, and December’s revenue should hit $216.15 million. So long as Apple’s sales remain strong, Cirrus should meet and even exceed those estimates.
Skyworks Solutions (NASDAQ: SWKS) has three of their chips in the iPhone 4, one in the iPhone 3 and 3GS, and one in the iPad, and increased the number of their chips used in the new iPhone 5. Skyworks' revenue is up 12% to $365 million from the same quarter last year, and analysts estimate September’s quarterly revenue at $419.26 million and December’s at $453.82 million.
Skyworks Solutions has taken steps to diversify and presently include Broadcom, Motorola and Cisco Systems in their customer base. But with Apple providing the lion’s share of Skyworks’ revenue, they’re still just another chipmaker heavily dependent on Apple’s fortunes.
Other companies take the opposite approach, ensuing diversification to pin their revenue hopes on one product. Build-A-Bear Workshop (NYSE: BBW) makes you wonder how the company managed to get their IPO underwritten. Kids and teens can go to a Build-A-Bear Workshop store, select a fabric bear skin, fill it with stuffing, and then choose clothes and accessories to complete the stuffed toy. It’s cute, it’s fun, but it’s not something most people would do on a frequent basis, which the financials “bear” (couldn’t help the pun) out. Annual revenue for 2011 came in at $394.4 million, down from 2010’s revenue of $401.5 million. Net income fell from $104,000 in 2010 to a net loss in 2011 of $17 million. With quarterly y-o-y growth of -1.70%, Build-A-Bear Workshop needs to introduce some new products to keep its workshops open.
Whether depending on one primary customer or a cute and trendy product to drive revenue, investors should take a hard look at these one trick pony stocks before becoming stockholders. Prudent investors may want to offset any stock purchase with a corresponding option taking the other side of the trade for portfolio protection.
kprogers has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Cirrus Logic. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.