It looks like Cirrus’ overdependence on Apple Inc. (NASDAQ:AAPL) is coming back to haunt it. When shares of Apple were having a great time, so was Cirrus. However, it looks like there is some trouble in Cirrus’ Apple Inc. (NASDAQ:AAPL) account, given the expected pressure on gross margin.
Rick Schafer, analyst at Oppenheimer, had stated (via Reuters) that there are a bunch of headwinds faced by Cirrus. Competition in audio codecs, which has been Cirrus’ permanent spot in the iDevices so far, margin pressures due to a lower-cost iPhone, and saturation of its Apple account are some of the reasons that he stated are behind Cirrus’ troubles.
There are a number of players who might unseat Cirrus for its codec spot and the same might have happened if analysts’ estimates for the September quarter, which is usually among the strongest for Cirrus, turn out to be true. Moreover, it might be possible that Apple Inc. (NASDAQ:AAPL) was able to negotiate a lower price for the chips given its clout, further pressuring Cirrus.
And while a cheaper iPhone should have ideally increased the addressable market for both Cirrus and Apple, the low revenue projection suggests that Cirrus might have missed out on the cheaper version of the device, which is already reported to be in the production stage. Again, the expected lower cost of components for a cheaper iPhone might be another reason why a cheaper iPhone isn’t expected to be a catalyst for Cirrus.
Cirrus had to record an inventory reserve in the fourth quarter due to the transition at Apple, and if recent comments of management regarding gross margin are considered, it might do the same once again. Apple is beginning to ramp up production of the next generation iPhone, as reported by All Things D. It is expected that Apple will launch the new iPhone in the fall, and if that’s indeed the case, one should ideally expect Cirrus to issue a solid outlook.
Final words
However, given the company’s recent woes and analyst estimates, I’m not too optimistic about Cirrus at this point. It’s true that shares are trading at a dirt-cheap 9.7 times earnings, which is surprising for a company that’s delivering solid revenue and earnings growth. But, the low earnings multiple suggests that the market isn’t expecting much from Cirrus either, and if it issues a depressing forecast once again, then Cirrus’ cheap valuation would be justified.
Cirrus is neck-deep in trouble and desperately needs a turnaround. Check back here again in a few days after the earnings report to see how the company performed and where it is headed in the future.
The article Doom and Gloom Set to Continue for This Apple Play? originally appeared on Fool.com and is written by Harsh Chauhan.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Cirrus Logic. Harsh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
