Can This Apple Supplier Make You Really Rich?

Marina is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With 2,500 customers worldwide, Cirrus Logic (NASDAQ: CRUS) was listed on Forbes' 100 fastest growing companies list in 2012. However, this year, the situation of Cirrus Logic has notably changed. Its stock has dropped 57% since the highs witnessed in October 2012. For the upcoming quarter, Cirrus Logic expects revenue to fall from $207 million to $160 million. What has led to this turnaround in fortune over such a short span of time? Let's take a look.

Tracking financials

In the latest earnings report, the company reported a 39% increase in cash, no debt, and repurchased 1.5 million shares. Cirrus Logic’s EPS has exhibited a positive trend in the past five years. However, as is the case with so many small companies, volatility can take over in a very short time frame. Numerous sources suggest that more than 85% of the company's revenue comes from services provided to Apple (NASDAQ: AAPL) for the audio chips for iPhones and iPads.

As iPhone 5 sales have been largely below analyst expectations, this has forced suppliers such as Cirrus Logic to revise their revenue expectations. Additionally, the company reported the possibility of a large inventory write-down, which could become a reality as Apple products continue to struggle against stiff opposition. 

Competition

Cirrus' competition is having a tough time in the market. The company’s performance can be fairly gauged when compared to peers from the same industry. I would focus on Texas Instruments (NASDAQ: TXN) and Qualcomm (NASDAQ: QCOM)

As more smartphone makers have begun developing their chips in-house, Texas Instruments has been forced to shift its business strategy away from making chips for the mobile market. The company is facing stormy waters as it strives to find a new market for it products. Coupled with a higher price than Cirrus and a P/E value on the wrong side of industry average, Texas Instruments is not my preferred chip stock at the moment. Instead, the company now focuses on building chips for embedded applications, including chips used in automobiles and industrial equipment.

Qualcomm, on the other hand, has greener pastures ahead of it as its Snapdragon powers the world’s first LTE-A smartphone. The company has long been associated with providing processors for Samsung’s Galaxy line of devices and it stands to benefit from the partnership further in future -- more so than before -- as Samsung continues to usurp Apple’s market share.

Furthermore, Qualcomm completed its final payment to become the second-largest shareholder in the Japanese electronics manufacturer Sharp. This will provide Qualcomm with greater opportunities to enter new markets. While Qualcomm is intrinsically a great buy, its growth prospects are now limited by the saturating handheld market; Cirrus Logic, on the other hand, can continue to expand in the long-term.

With a market capitalization of $1.1 billion, Cirrus is understandably a much smaller company -- but with all the more potential to make big gains on the market.

Indicator

Cirrus Logic

Texas Instruments

Qualcomm

Market Cap

$1.1 billion

$38.7 billion

$105.6 billion

Price/Earnings ttm

8.7

21.3

17.2

Price/Book

2.0

3.5

2.8

Net Income Growth (3 Yr Avg.)

52.7

6.2

56.6

Revenue Growth

(3 Yr Avg %)

54.2

15.7

22.4

Dividend Yield, %

-

2.50

1.80

Return on Equity

26.9

16.9

18.0

Debt/Equity

-

0.4

-

Current Price

$16.82

$34.59

$60.70

*Data from Morningstar on June 30

In a straight out comparison with peers, Cirrus Logic and Qualcomm seem to be undervalued when compared to the industry average (21.6). Cirrus Logic is affordable and has growth potential.

The company does not provide any dividend while Texas Instruments and Qualcomm provide their shareholders with a solid dividend. Cirrus Logic has no debt and is in a very comfortable liquidity position. If required, the company can take on loans to finance its increasing R&D spending.

Prospects

Cirrus Logic currently has a share repurchase program. Its over-reliance on Apple has hurt it badly since October 2012. Cirrus Logic generated almost 85% of its total revenue just from one client -- Apple. However, with a welcome reception given to iOS 7, many analysts believe Apple has addressed the Achilles’ heel for its products -- the aging software. With a possible launch of two new iPhones in the last quarter of 2013, this could be a very bright opportunity for investors to buy into Cirrus Logic.

Furthermore, as Apple introduces trade-in programs and efforts to boost sales of its products, Cirrus Logic stands to benefit. The company provides a low cost option for taking a risk with the world's most cash rich company -- Apple.

I see this as a calculated risk and believe that Apple's fortunes hold the key to Cirrus Logic’s short-term fate. In the long-term, however, I expect the company to decrease its reliance on Apple for revenue, especially since the Cupertino-based giant is known for playing hard ball with its suppliers.

Bottom line

With Apple probably making moves to boost sales, Cirrus Logic might not have to go through a massive inventory write-down as demand for the iPhone and the iPad picks up. My advice: Buy Cirrus Logic because of its cheap price and solid prospects.

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Marina Avilkina has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, Cirrus Logic, and Qualcomm. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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