Is Apple Giving you Pain? This Derivative Play Might Ease Some of It

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Apple (NASDAQ: AAPL) might have failed to live up to the Street’s expectations but not all is going awry for those who have invested in the iEmpire. Cirrus Logic (NASDAQ: CRUS), which supplies audio codecs for iDevices, thumped estimates in the second quarter and set the tone for a strong finish to the year with yet another stratospheric guidance.

Cirrus Logic is one of the most definitive Apple plays, as it derives almost two-thirds of its revenue from the iPhone maker. Apple sold 26.9 million iPhones and 14 million iPads in the previous quarter, and these drove Cirrus’ revenue higher. The company’s top line jumped a massive 91% from last year, clocking in at $194 million and easily beating the consensus estimate of $181 million.

A spectacular bottom line performance was another positive takeaway for Cirrus. Its adjusted earnings of 79 cents a share were better than consensus estimates of 71 cents a share, and also bettered the 33 cents per share earned last year. Such an outstanding performance was rounded off by an impressive guidance for the ongoing quarter.

Cirrus expects to post revenue between $270 million to $300 million in the third quarter, a range which is comfortably ahead of the Street estimate of $238 million. The company might have surprised the Street with an astounding guidance but this was something I had expected from Cirrus.

Feeding off the Most Delicious Fruit in the Garden -- Apple

Cirrus’ chips have been a permanent fixture in iDevices for the last three years, and the company’s fortunes have been on the rise ever since. As Apple sold millions and millions of iPhones and iPods and added to its product family with the iPad, Cirrus has found more room to grow its revenue. And going by the company’s current projections, it seems it is ready to cash in further on the popularity of Apple’s products.

The Cupertino-based behemoth might be under pressure nowadays, but sales of its products are not losing steam. Apple sold 125 million iPhones in FY12, a spike of almost 73% from FY11. Moreover, if we are to go with Michael Walkley of Canaccord Genuity, the company is expected to sell close to 200 million iPhones and 100 million iPads in FY13.

Apple has some solid drivers in its bag and Cirrus Logic is expected to get better on the back of those drivers. Firstly, the iPhone 5 should sell impressively in the holiday quarter. The device has already upstaged the iPhone 4S and I expect it to get even better next year as Apple releases the device across the world and more people purchase it after the expiry of their contracts. In addition, I believe that the latest product from Apple’s stable, the iPad Mini, should help the company in increasing its lead in the tablet market.

Ready to Ride the LED Wave

Apple might be the driving force behind Cirrus, but there is another area I believe we should take a look at. Cirrus makes chips for use in LED lighting, an up and coming industry that has huge potential for growth going forward. Players in this industry have witnessed steady growth in their revenue and they should perform even better going forward as the world switches to environment-friendly lights.

For example, Cree (NASDAQ: CREE), which is a pure play LED lighting company, has seen impressive growth in revenue over the past few years. The company’s strong R&D has enabled it to find a good number of customers and its lighting products are finding good adoption, a fact which is further evidenced by Cree’s improved order backlog last quarter. Cirrus would try to emulate its Apple success in the LED market by riding the LED trend which is slowly but steadily gathering steam.

The Takeaway

Cirrus has appreciated almost 160% so far this year and there seems to be no stopping. The company is consistently getting better with each passing quarter, primarily on the back of its relationship with Apple and its interests in emerging technologies such as LED lighting should help drive further growth in the future.

If you are still not riding the Cirrus bandwagon, you might miss further gains. The company might be trading 32 times its earnings, but a forward P/E of 12 suggests that there is a lot of growth still to come for Cirrus in the future, and I believe you shouldn’t miss out on this growth.

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TechJunk13 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.

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