It's Showtime for This Risky Stock With Huge Potential

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

A trailing P/E multiple of 18 times, a forward P/E multiple of 8 times, and a terrific PEG ratio of just 0.33 indicate that there’s a lot of growth lying ahead for Cirrus Logic (NASDAQ: CRUS). The stock had taken off in the second half of last year and touched a high of almost $45.50, but then tragedy struck and the company’s shares crashed massively to their current sub-$30 levels.

However, the stock has been trading at reasonable levels ever since the crazy (and sometimes outrageous) beat down of its illustrious client Apple (NASDAQ: AAPL) started gathering steam in late September. Hence, it would make sense to take a closer look at Cirrus at these levels, especially with its third-quarter results just around the corner.

A beat is on the way?

The probability of Cirrus meeting or beating estimates in the third-quarter is pretty high since the company itself had called for an astronomical guidance last time. It sounded out a revenue guidance of $270 million to $300 million, which was way ahead of the $238 million consensus. However, as expected, estimates have moved higher ever since with revenue estimates sitting at $286 million and earnings at $1.42 now.

These forecasts represent revenue growth of 134% and bottom line growth of 230%, which is absolutely phenomenal. However, even then I would count on Cirrus to deliver estimate topping numbers, given the fact that Apple is expected to have sold close to 50 million iPhones last quarter, which is way ahead of the 37 million in the year-ago period. Moreover, Apple’s introduction of the iPad mini and the 4th generation iPad should also contribute to higher sales, and push Cirrus beyond analyst estimates.

An edgy outlook?

However, all eyes will be on the outlook. Cirrus has been upstaging analysts’ outlook estimates handsomely over the past couple of quarters, but the same might not be the case this time around. The news that Apple was cutting down component orders is one of the reasons why Cirrus might not sound out a terrific outlook once again.

But iPhone supply cuts aren’t as bad as they seem, since there was no way Apple could have sold 65 million iPhones in the March quarter given the fact that roll out was faster this time, and the fourth-quarter is traditionally its best quarter. Also, the company had already said that it expects lower revenue in the March quarter, which is seasonally a weak one since the next iPad/iPad mini might be the only product(s) that Apple launches in the quarter.

But already priced in

Hence, with the beating that Cirrus shares have taken of late on such news, the bad news about production cuts and a lower outlook seems to be already priced in. Apple might have another device in the works as evidenced by its huge purchase commitments of $21.1 billion and explained by Fool analyst Evan Niu. In such a case, Cirrus would stand to benefit once again from another addition to the iEmpire.

Cirrus is closely tied to Apple and has shared its client’s pain over the past few months as bashing the Cupertino-based giant has become fashionable of late. Both companies are witnessing terrific growth, and the iPhone’s advent in China and other emerging markets in due course of time should result in more growth.

Final words

Cirrus’ close ties with Apple are both a blessing and a bane, with investors witnessing the latter over the past few months. However, Cirrus is also looking to diversify into other areas and new technology which could help push its revenue further north in the long run. Given the company’s current valuation, investors might look to get some more of Cirrus for their portfolio, but they also need to be prepared for a wild ride.

But if you need some more clarity about Cirrus’ direction, check back again in a few days for the complete earnings analysis and insights, and see why CAPS investors have given the company a five-star ranking.

TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Cirrus Logic. 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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