Apple’s Hurt, But This Apple Play Is on a Roll

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

There must be many who are aggrieved by Apple’s (NASDAQ: AAPL) latest miss, while those who have been after the Cupertino-based behemoth’s head ever since the latest iPhone came out are enjoying their moment of triumph. A 29% jump in iPhone sales and a 48% increase in iPad sales weren’t good enough to satisfy the highly optimistic targets set by analysts, and the result was a massive meltdown of Apple shares.

Apple’s woes rubbed off onto its supplier ecosystem, but should this have really happened? Shares of component suppliers, such as those of Cirrus Logic (NASDAQ: CRUS) tanked, in the aftermath of Apple’s record results. But this was a clear case of panic, since higher sales of iDevices should naturally be good news for component suppliers.

Firing back in style

Thus, when Cirrus finally reported earnings a day after Apple, the results were just fantastic. Revenue of $310 million was a whopping 153% higher than last year, and cruised past the $285.7 million Street estimate. Also, adjusted earnings of $1.64 a share sped past the $1.41 per share consensus estimate and were 105% higher than last year.

Following such spectacular results, the stock shot through the roof and was trading more than 10% up as of this writing. The roller coaster ride of Cirrus shares shows how irrational the market can be at times, and all those investors who don’t stick to fundamentals and instead go along with the herd end up as losers more often than not.

Before Cirrus reported earnings, I had said that the stock is nicely valued and offered a good entry point for investors. There was almost no doubt that Cirrus would beat estimates, which it ultimately did, but the outlook could have been edgy as I had stated in the earnings preview. And it did turn out to be that way.

Bad news baked in, the good to follow

The company’s revenue expectation of $200 million to $220 million is well-short of the $234.9 million analyst estimate. However, with all the bad news being already priced in (such as order cuts by Apple), Cirrus shares are enjoying their time under the sun after being bashed for no concrete reason over the last few months.

Apple’s terrific increase in iPhone and iPad sales is no mean feat, and expected sales of $41 billion to $43 billion for the current quarter are again not bad from a component supplier’s perspective. Apple’s still growing, and its foray into emerging markets such as China could further help the iPhone maker’s revenue, and in turn Cirrus Logic’s.

Cirrus has suffered in the past few months due to its close ties with Apple, from whom it derived 91% of its revenue in the quarter. But it’s clearly evident that the Street’s reaction towards Cirrus on the basis of Apple’s results was based on more of hearsay rather than facts. Its biggest client’s top line is still growing, iDevices are still selling in record numbers and who knows Apple might pull off yet more magic in the future to drive its top line even higher.

Moreover, Cirrus doesn’t want to leave its top line at Apple’s mercy. It has taken steps to diversify its business and has started shipping its components to a number of phone makers, one of which happens to be a Tier 1 phone maker. In addition, Cirrus’ is also focusing on its LED lighting business and expects it to perform well going forward, as it won over another customer in the previous quarter.

Intriguing proposition(s)

Cirrus trades at a forward P/E of just 8 while a terrific PEG ratio of just 0.31 tells us that there’s a lot of growth ahead for this stock. However, given its close relationship with Apple, the stock had taken an unnecessary beating. But it’s paying back its detractors handsomely after yet another stellar performance. Its relationship with Apple shouldn’t be seen a negative, while diversification and interest in an emerging industry such as LED lighting are good strategic moves.

Considering all these factors, Cirrus looks like an intriguing investment since it trades at a not too expensive trailing P/E of around 19 times and is set to grow further in the future. And if you’re looking for more growth options, there’s another stock which calls for attention.

Skyworks Solutions (NASDAQ: SWKS), which closely resembles Cirrus in terms of valuation, counts leading smartphone makers (Apple and Samsung) as customers and has lost more than 20% over the past six months. It's set to benefit from increased data usage going forward and a forward P/E of just 8.7 times along with a PEG ratio of just 0.65 are impressive to say the least. It is set to release its next earnings report on Jan. 30 and it won’t be surprising if it spikes like Cirrus has.

If you’re looking to initiate a long position in Skyworks, now would probably be a good time. But if you’re in need of more analysis, check this space again in a week for the latest on Skyworks Solutions or add it to your Watchlist by clicking here.

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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