Cirrus Logic: Is This Undervalued Company a Buy?

The present market situation for chipmaker Cirrus Logic (CRUS) doesn't appear to be good. The company has lost its momentum and has been reporting upsetting results. The stock is declining and looks like a bad pick at present.

The Problem

Cirrus itself is responsible for its downfall. The company failed to diversify its customer base, and this has hurt its performance. Unfavorable pricing at Apple and over reliance on one customer for revenue has eroded Cirrus' profitability. The stock trades at just 10 times last year's earnings, and this might lead many to believe that Cirrus could be a value play.

The stock can be a good pick even in such a difficult situation. It is focusing on various aspects for growth. Its current position in Apple's empire and its focus on emerging tech such as wearable devices, and aggressive research and development moves might help Cirrus gain ground going forward. However, its too early to rely on Cirrus as a good pick until it proves its claims by posting outstanding results.

Weak So Far

Cirrus, with its poor results, has failed to impress investors over the past few quarters. This has led the stock to trade at the lower end of its 52 week-range. The weakness looks set to continue as Cirrus called for revenue of $130 million to $150 million, significantly behind consensus estimates of $175.3 million. As a result, investors might want to stay away from Cirrus until it shows any concrete signs of gaining market share.

Cirrus might see further declines in its performance and can struggle as its relationship with Apple is no more lucrative. This is also a reason why Cirrus has to seek for other ventures to gain its momentum back.

It is quite evident that Apple is also struggling. It is going through a rough patch as its guidance for the quarter shows. However, some analysts still believe that demand for Apple's devices are still strong. Apple is also focusing on China and the latest deal with China Mobile should benefit Apple. This will also benefit Cirrus as there is growing demand for its components. But, since Cirrus has already achieved peak revenue from Apple and Apple is now more focused on the low cost segment, it might not be as lucrative as it was earlier for Cirrus.

The 29% year-over-year drop in Cirrus' revenue "was due mostly to a shift in pricing structure, as well as product mix." Now, it is an easy guess as to what was the reason behind the change in the pricing structure. Given that Cirrus generates a huge amount of revenue from Apple, this would continue hurting the company as its biggest account stagnates, or even declines.

However, to equalize the weakness that Cirrus is seeing from Apple, it is now focusing on diversifying its business. As per the latest news, Cirrus is now focusing on energy-related applications, but it is still struggling. This can be noted by a 22% decline in this segment in 2013 as compared to 2012. In addition, Cirrus is trying its hand in the wearable device and voice recognition segment.

Conclusion

Cirrus might seem undervalued, but the company still has the potential to help investors make money in the volatile market. however, it will not be a wise decision to pick Cirrus out emotional flow. The investors must see investment in Cirrus from sidelines until there are concrete signs of company gaining market share.

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