Cirrus Logic, Inc. (CRUS): This Stock Plunged, But Expect a Rebound Soon

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Ever since Barclays presented Cirrus Logic, Inc. (NASDAQ:CRUS) in negative light at its TMT (technology, media, and telecommunications) conference, shares have dropped back to the teens. Barclays said that it expects lower average selling prices would hurt sales this year. Concern was high that that its largest customer represented 85% of revenue in the fourth quarter.

Cirrus Logic, Inc. (NASDAQ:CRUS)

Reliance on one customer

Cirrus relies on Apple Inc. (NASDAQ:AAPL) for more than half of its revenue. This is a glaring red flag, but is not anything new for investors. Still, the ominous decline in unit sales for Apple’s iPhone 5 will hurt Cirrus Logic, Inc. (NASDAQ:CRUS). The supplier saidin a filing that average selling prices are expected to fall, while gross margins will be between 50% and 52%.

Apple is known to be a tough dealer with suppliers, pressuring them to provide the lowest possible cost at minimal margins. Just ask OmniVision Technologies, Inc. (NASDAQ:OVTI) or Nuance Communications Inc. (NASDAQ:NUAN). OmniVision did not provide in-depth detail on its arrangement with Apple, but suffered from weak margins after building up inventory in anticipation of providing the image sensors to Apple.

Voice recognition maker Nuance also suffered from lower margins, though the decline was less severe. Nuance operates in many other areas of the market, which helped sustain profit margins:



OVTI Gross Profit Margin TTM data by YCharts

To diversify its business beyond health care and Apple products, Nuance acquired Tweedle Connect for $80 million. Tweedle Connect aggregates third-party applications and content for in-car infotainment systems. By combining voice recognition from Nuance’s Dragon Drive with the acquisition, investors should benefit with the expansion in the car-entertainment segment.

OmniVision shares were already up 15% in a month, in anticipation of strong quarterly earnings. In the last two quarters, the company has exceeded consensus estimates. Even with a P/E of 23, the forward P/E is just 9.8. Last month, the company announced the OV9728 sensor for high definition 720p video devices. The sensor was built around OmniVision’s 1.75-micron OmniBSI+ pixel.

The core area of sales growth is with smartphone camera sensors, but the company is diversifying its revenue sources. OmniVision is capitalizing on its advantage in low-light sensors by supplying for Smart TVs, surveillance, medical imaging systems, and portable devices. These applications are also outside of the smartphones and tablet space.

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