Cypress Semiconductor Corporation (CY): Avoiding This Stock Is In Your Best Interests

Well, it wasn’t to be. After enjoying a rally over the past two months, shares of chipmaker Cypress Semiconductor Corporation (NASDAQ:CY) plunged after the company failed to bundle its first-quarter results with a good enough outlook. And with that, all hopes of a turnaround that Cypress Semiconductor Corporation (NASDAQ:CY) has been harboring since the year began got quashed.

As I’d stated in the earnings preview, the stock had rallied on the back of an upgrade by analysts at Needham, who were expecting the company’s products to find traction and margins to expand. Sadly, Cypress seems to be failing on these counts, as increased competition in the market for touchscreen controllers is expected to hurt revenue and profitability.

This looks bad

As far as first-quarter results are concerned, there’s nothing much to write home about. Cypress Semiconductor Corporation (NASDAQ:CY) posted revenue $172.7 million and earnings of $0.03 per share, ahead of consensus estimates that were already quite low. Both revenue and earnings were lower than last year’s figures, while the company’s guidance left a lot to be desired.

Cypress expects revenue of $178 million to $186 million for the ongoing quarter, while the Street had set the bar at $183.1 million. If this was bad, then the bottom line expectations are even worse. Cypress is looking to earn $0.06 to $0.08 a share and the Street expected $0.09 per share. Cypress Semiconductor Corporation (NASDAQ:CY) gave more fodder to the bears when it said that its gross margin would continue to be depressed this year, after falling to 50.7% in the first quarter from 55.7% in the prior-year period.

A difficult road

Despite all this negativity, management did try to put up a brave face and offered some positives. Cypress exited the quarter with a book-to-bill ratio of 1.04, which signifies that the company is witnessing demand for its products. Much of this demand is expected to be driven by its Programmable System Division (PSD), which makes its most important products — TrueTouch and CapSense.

These touchscreen controllers are used across applications such as mobile devices and automotives. Cypress’ important customers for these chips are Samsung and Amazon.com, Inc. (NASDAQ:AMZN), while carmakers such as Toyota are also trying them out. Cypress expects ramp up of new products to drive its revenue, but the company has failed to land a juicy design win for its controllers.

While Cypress did supply its chips to Amazon.com, Inc. (NASDAQ:AMZN) for the 8.9-inch Kindle Fire HD, the tablet didn’t turn out to be as successful as its smaller cousin, a fact that became evident when Amazon.com, Inc. (NASDAQ:AMZN) started discounting the Kindle Fire HD in order to move more units off the shelves. The price cut might lead to better sales, at least till the next iteration of the tablet is launched, as the $269 WiFi Kindle Fire HD would seriously undercut Apple Inc. (NASDAQ:AAPL)’s iPad mini.

Moreover, customers might even pay $399 for the LTE version. But, it remains to be seen if Amazon’s move can ignite demand for the tablet and consequently lead it to place more orders, which would be a positive for Cypress Semiconductor Corporation (NASDAQ:CY).