Why Investors of This Stock Are Looking For an Encore

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

After reaching bottom of $5.51 per share, investors have given Audience (NASDAQ: ADNC) a standing ovation. Since the lows of October, the stock has more than doubled – gaining 120% to reach $12. But it wasn’t too long ago that shares were trading well above $20. This means, despite the strong 120% gains, the stock is still down close to 50% over the past six months. Why?

The reason -- just weeks ahead of Apple’s (NASDAQ: AAPL) launch of the iPhone 5, Audience announced that Apple would no longer utilize its voice and noise suppression technology. Investors panicked, sending the stock down 70%. However, a nice performance in Q3 proved there was more to this act. But for shares to continue upward, investors are demanding an encore.

Was Q3 a Worthwhile Audition for Q4?

While Apple’s “halo effect” has become legendary to the extent that it has raised the profile of several Apple component suppliers such as Qualcomm (NASDAQ: QCOM), Audience’s situation proved that doing business with Apple is a double-edged sword. Then again, that Apple represented 40% of Audience’s total revenue was a strategic blunder and flawed execution.

In third quarter, the company did what it had to do to redeem itself – posting net income of $4.9 million on revenues of $40.8 million. However, the most impressive aspect of this report was that revenue surged 55% year-over-year and 22% sequentially.

As component suppliers are concerned, this compares favorably with Qualcomm’s 18% growth, since it’s considered the standard. But then again, that Qualcomm ended the year with profits of $6.11 billion, which grew 43%, proves that it is more than just a parts supplier.

However, Qualcomm attributed the strong performance to higher than expected chip and smartphone shipments, which reached 141 million – jumping 1% year-over-year. This is important to note because even though Audience lost its business to Apple, the company also has strong relationships to both Samsung and Google, which clearly offset potential revenue declines.

Unfortunately, this was not the case for another part supplier in Texas Instruments (NASDAQ: TXN), which just reported a disappointing fourth quarter during which revenue declined 13%. While Audience figured out a way to mitigate Apple’s damage, Texas Instruments has posted five consecutive quarters of deteriorating sales.

And unfortunately, things are not expected to improve as the company guided Q1 6% lower. For Audience though, the company is also working towards improved profitability as margins advanced 8 points year-over-year propelling EPS upward by 60%. As impressive as that is, it’s worth noting that the company had significantly less shares outstanding at this point in 2011.

Is an Encore in Q4 Possible?

As enjoyable was the show in Q3, guidance for Q4 was a big letdown. Audience expects net income, which includes stock-based compensation and expenses, to arrive at the high range of $1.7 million, or 4 to 8 cents per share. The company projects revenue of $38 million – representing a sequential decline of 7%. Likewise, margins are expected to arrive (at best) flat.

As sour as the guidance was, it’s hard to fault any company for playing it conservative only one quarter removed from losing a large customer such as Apple. Besides, there’s no other direction the company can go from here. So it makes no sense to apply on itself any unnecessary performance-based pressures.

What’s more, that Q3 arrived as well as it did was nothing short of remarkable. Too, growth indicators were positive and the company is now in the midst of expansion into markets such as China. To the extent that Audience can secure new hardware design wins, there is potential here for a remarkable bounce-back play.

Bottom Line

Audience still has a long way to go before it fully recovers. But the company also has plenty of time. That Apple opted to nix its relationship is certainly a concern – especially since Apple is keen on its ability to enhance the user experience.

Regardless, this does not take away from Audience what is perceived as superior noise technology. Still, from an investment standpoint, I’m not excited about jumping into a stock that has gained this much, this soon. But over the long term, investors of Audience will be glad they bought this ticket. 

Richard Saintvilus is long Apple and has no position in the other stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple 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.

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