Cypress isn’t Worth Your Money Yet
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Maker of touchscreen controllers and other mobile computing chips, Cypress Semiconductor (NASDAQ: CY), was hammered last week after posting mixed results and coming short on guidance. The company failed to meet the Street’s top line forecast but managed to meet on the bottom line. However, like we have seen with many others this quarter, Cypress held “macroeconomic concerns” responsible for the light outlook.
Fool analyst Seth Jayson has already briefed us about the numbers. Now, I will try and see whether there is light at the end of the tunnel for Cypress. But before that, let’s see what ails the company.
What gives?
A sluggish economy and delays on the part of Cypress, which led to the loss of a few design wins, weighed in on the top line which went down a staggering 21% from last year. Moving forward, the company sees muted growth in the third quarter, primarily due to a gloomy economic outlook and lower bookings by customers.
A silver lining
However, quite impressively, Cypress kept its costs under control. Its gross margin declined only 0.2 percentage points from last year to 57% in the quarter, as against the massive drop in revenue. Also, there were some other positive takeaways from the quarter. Cypress’ top line improved 9% on a sequential basis despite seasonality. Moreover, its TrueTouch touchscreen controllers, which had helped Cypress enjoy a good time last year, saw demand increase by 21% sequentially.
Moreover, Cypress has a long standing partnership with NVIDIA (NASDAQ: NVDA) for developing these TrueTouch controllers. Now, these controllers are used in Android-based devices, and utilize the Tegra 3 processor. Although NVIDIA itself hasn’t done pretty well this year on the whole, the Tegra 3 architecture has been a hit among smartphone makers because of its efficiency. It is featured in the HTC One X.
Rough weather ahead
But here’s the problem. NVIDIA’s Tegra 3 isn’t the chip of choice for the major brands yet. Apple (NASDAQ: AAPL) uses in-house chips for its phone and tablet. Also, Samsung is also down this path with its own Exynos processor. Hence, even though Cypress’ partnership with NVIDIA is an important one, it might take some time before we see some solid gains from it.
But there are other possibilities for Cypress going ahead. I have previously spoken of Cypress’ controllers being used in the next iteration of Amazon’s (NASDAQ: AMZN) Kindle Fire. Brokerage firm, Sterne, Agee & Leach which hosted CFO Brad Buss at the Sterne Agee Tech Conference, is of the opinion that the next Kindle Fire will help drive Cypress’ prospects. Now, the Kindle Fire is among the best-selling tablets after the iPad, and if Cypress does become a supplier, it would help the company see better days going ahead.
But, I am afraid that even Amazon might not be able to help Cypress much in the case that Apple's iPad mini becomes a reality and Google’s Nexus 7 becomes a raging hit. Fool analyst Evan Niu recently told us what various industry watchers had to say about the iPad mini, and it might happen that Apple’s smaller tablet could hit stores in a few months. Considering the $250-$300 price tag which the mini is rumored to carry, Amazon’s Kindle Fire faces some really stiff competition.
The bottom line
As of now, Cypress looks like a game of pros and cons. It is capable of tilting either way depending on the end users of its products. Moreover, the company’s wireless communications business hasn’t been in the best of health, just like the rest of the industry. It is engaged in an antitrust suit against GSI Technology as well, which is again a point of concern.
With lack of visibility going forward, it would make sense to hold your horses on this one. The stock is perilously close to its 52-week low and might take some time before it sees better days. To keep an eye on Cypress, and track its progress, add it to your Watchlist by clicking here so that you don’t miss out when the turnaround begins.
TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Amazon.com, Apple, Cypress Semiconductor , and NVIDIA. 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.
