Cirrus Logic, The Compelling Opportunity

Mar. 2, 2018 5:24 PM ET|About: Cirrus Logic, Inc. (CRUS)
Summary
The past 6 months the stock has been heavily discounted.

Voice connectivity via electronic devices will be exponentially increasing in the future.

Cirrus Logic CS47L90 low power smart codec with "always on" technology has the potential to revolutionize the smart phone space in 2-3 years.

If anyone has been paying attention to Cirrus Logic (CRUS), the Austin, Texas based Audio Codec maker for companies such as Apple (AAPL), and Samsung (OTC:SSNLF), they understand that it has been beaten down to no end. With a 52 week high in the $70 range, the stock currently sits at the time of writing this article at slightly above $43. Now might be the right time to buy in, or double down.

In recent news, investors saw it plunge 10.9% after missing on both EPS and revenue, however, this is hardly worrisome. As it is clear to see from their most recent investor presentation, the growth of the company is strong. It is important in a situation like this to not be so close to the trees that one cannot see the forest. If the company was to post declining numbers or negative growth, it might be time to panic. However, this is not that time.

Image result for cirrus logic investor presentationEven in the case of FY'14 where the company failed to exceed the revenue in FY'13, they still were able to correct the ship and sail to new heights in FY'15, FY'16.

Looking at their most recent updated balance sheet they have grown they Total Current Assets from 44.53M in 2013, to 775.92M in 2017. This is contrasted however with their Total Liabilities which were 103.17M in 2013.They have grown to 261.77M in 2017. If percent increases were taken into effect their rise in assets would be 1642.47%! This is juxtaposed to their rise in liabilities which would equal a 153.73% increase. When this is taken into consideration, it makes Cirrus's balance sheet one of the stronger ones out their in terms of their asset liability difference, and their increases of assets over a long period of time.

Image result for cirrus logic investor presentationPlease view the entire investor presentation here: https://s21.q4cdn.com/307563939/files/doc_financials/2018/q3/Cirrus-Logic-February-2018-IR-Presentation_Final.pdf

Every Stock is not without risks, and there are two major risks with (CRUS) that I would like to point out today. Located on page 16 of their most recent 10K, Cirrus states; "We depend on third-party subcontractors, primarily in Asia, for the fabrication, assembly, packaging, and testing of most of our products." This could be trouble some for a few reasons. First off they discuss the relatively high prevalence of natural disasters in the Asian area, and such a disaster would be troublesome financially. They further state, "...we would be required to transfer manufacturing to a backup supplier. Converting or transferring manufacturing from a primary supplier to a backup facility could be expensive and time consuming." This of course would all come to light in the next quarterly reports, and would negatively impact the stock.

More importantly in terms of Cirrus's risks would be the large reliance on Apple for the lions share of their revenue. They state that, "For fiscal years 2017, 2016, and 2015, we had one end customer, Apple Inc., who purchased through multiple contract manufacturers and represented approximately 79 percent, 66 percent, and 72 percent, of the Company’s total sales, respectively. Samsung Electronics represented 15 percent of the Company’s total sales in fiscal year 2016. No other customer or distributor represented more than 10 percent of net sales in fiscal years 2017, 2016, or 2015.

There are a various articles detailing just how improbable it would be for Apple to cut Cirrus out, however, this is something that should be known to all investors, as it poses a potential catastrophic risk.

Finally getting into the more technical aspect of CRUS their new Codec the CS47L90, is a compelling new low power codec which is deemed their new "flagship product," for the next generation of smart phones. “The ability to wake up and control your mobile device using nothing but your voice is a rapidly growing capability that consumers expect from their smartphones,” said Carl Alberty, vice president of marketing, Cirrus Logic. Furthermore, the ability to unlock smartphones with voice bio-metrics is right around the corner, and CRUS is poised to be the leader in the space. In such an emerging market by bringing the capabilities of voice recognition to the every day cell phone user, it will begin to take it all to the next level. Looking further down the road unlocking your car, starting the engine, unlocking your home could all be possible with the CS47L90 audio codec by CRUS. Finally, with the "always on" technology you no longer have to hold down the smartphone home button to fire up SIRI or the Google Client, as it will always be listening for your voice commands. By coupling the "always on" technology and the new lower power capabilities, I predict CRUS has the ability to double the companies revenue in the next 3-4 years.

The stock much to the horror to those invested has been beaten down in recent months, however I believe there is a very bright future for CRUS, and to those looking for a compelling long term value play this just might be it.

Disclosure: I am/we are long CRUS.