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Apple Inc. (AAPL), Cirrus Logic, Inc. (CRUS), And Who Might Go Higher Than The Clouds

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It seems like the Street has a penchant for punishing Cirrus Logic, Inc. (NASDAQ:CRUS). The stock was punished heavily in mid-April after the company released preliminary results, dropping to the tune of around 17% in a single day. The preliminary results revealed that Cirrus would be missing estimates and its gross margins would take a hit. The shares crashed heavily, and rightly so, at that time.

Double trouble

However, when Cirrus Logic, Inc. (NASDAQ:CRUS) actually reported results last week its shares crashed once again, this time around 9%, even though it had indicated beforehand that its quarterly report would be ugly. The outlook for the ongoing quarter wasn’t great either, as Cirrus said that it expects revenue of $150 million to $170 million, marginally ahead of the $159 million consensus estimate.

But then, it won’t be exactly right to compare the revenue estimate for the ongoing quarter to Street estimates, as it has fallen rapidly to adjust in-line with Cirrus Logic, Inc. (NASDAQ:CRUS)’ own expectations. For instance, as the Associated Press pointed out, the estimate was around $191 million in mid-April, but is well below that number now.

Apple Inc. (NASDAQ:AAPL)

Incredibly cheap

Cirrus is quite adept at sharing the pain of its largest customer, Apple Inc. (NASDAQ:AAPL), from whom it derived 85% of total revenue in the previous quarter. It is this customer concentration that has weighed heavily on Cirrus. In Apple’s halcyon days, Cirrus Logic, Inc. (NASDAQ:CRUS) rode its client’s coattails to great effect and was trading in the mid-$40 range. Cut to the present, and the stock is trading within 10% of its 52-week low. But this is where it gets real interesting.

Cirrus trades at a P/E of just 9.35, its PEG ratio is just 0.39, and its EV/EBITDA multiple is only 4.46. All these metrics point toward one thing — the company is undervalued at its current price, especially considering the high growth it has seen over the past year or so. The only sticking point is its high dependence on Apple Inc. (NASDAQ:AAPL), which has led it to its current misfortunes. However, there seems to be a strong belief among investors that the company has finally bottomed out, as it’s trading up around 8% as of this writing.

Sensing an opportunity

While Apple Inc. (NASDAQ:AAPL)’s transition to its new product lineup was the reason behind Cirrus Logic, Inc. (NASDAQ:CRUS)’ pain in the previous quarter, the soft outlook for the ongoing one isn’t much surprising, considering that the June quarter has always been a slow one for the supply chain. The company had to record an inventory reserve of $20.7 million, which took down its gross margin to 40.4%, down around 10% from last year.

But from here, things should get better. While the erstwhile revenue estimate of $191 million would’ve made sense if Apple had pushed out its products in June, that doesn’t seem to be the case anymore. Analysts expect that Apple Inc. (NASDAQ:AAPL) would refresh its product line up in September, like it did last year, and that’s the quarter when Cirrus should see better revenue.

A greater market to help Cirrus

Moreover, there’s another factor that could work in Cirrus Logic, Inc. (NASDAQ:CRUS)’ favor — a low cost iPhone. As analysts at Citigroup Global Securities pointed out, Apple Inc. (NASDAQ:AAPL) might release the low-cost version of the device in early September, along with the rumored iPhone 5S. Also, if the research firm’s claim that Apple would launch a TD-SCDMA version of the iPhone for the Chinese market comes true, then both Cirrus and Apple can expect to finally benefit immensely from the smartphone boom in the Middle Kingdom.

Moreover, given the fact that Cirrus’ audio codecs are omnipresent inside all the major devices of Apple Inc. (NASDAQ:AAPL) — be it an iPhone, the iPad, or the iPod — a refresh in the lineup would provide Cirrus a much needed boost. But, apart from a low-cost iPhone and Apple’s foray into China, the next big thing that could drive Cirrus would be the retina iPad mini.

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