Reliance on a single buyer for an enormous chunk of income is weighing on this firm, however that might flip into a bonus sooner or later.
Chipmaker Cirrus Logic (CRUS 0.15%) has been in superb type on the inventory market for almost all of 2024, as its shares rose impressively by means of August this 12 months, however a better have a look at latest inventory value motion means that its rally has come to a shuddering halt up to now couple of months.
Extra particularly, Cirrus inventory is down practically 30% since hitting a 52-week excessive on Aug. 29, and the corporate’s newest quarterly outcomes have not been sufficient to assist flip its fortunes round. Shares of the corporate that is identified for supplying chips for Apple‘s (AAPL -0.12%) client units reminiscent of iPhones and iPads fell 7% in prolonged buying and selling following the discharge of its fiscal 2025 second-quarter outcomes (which ended on Sept. 28) on Nov. 4.
Let’s have a look at why that was the case and examine if the inventory’s dip is a chance for traders to purchase extra shares.
Cirrus Logic’s numbers have been higher than anticipated — however there was one downside
Cirrus reported fiscal Q2 income of $542 million, up 13% from the identical interval final 12 months. It can be value noting that the corporate’s income elevated a formidable 45% on a sequential foundation. The studying was effectively forward of the midpoint of Cirrus’ Q2 income steering of $520 million.
The robust improve in its income was pushed by “larger unit volumes related to new smartphone launches.” In less complicated phrases, Cirrus benefited from the launch of recent iPhones by its largest buyer, Apple, which accounted for a whopping 90% of its prime line final quarter.
That is not stunning, as Apple is reportedly tapping Cirrus for each audio and energy administration chips within the newest iPhone era, as suggested by a teardown of the devices. It is value noting that Apple’s income from gross sales of iPhones was practically flat within the quarter that resulted in September at $201.1 billion. IDC estimates that Apple’s iPhone shipments elevated by 3.5% within the third quarter of 2024 to 56 million models, making it the world’s second-largest smartphone firm, with a share of 17.7%.
Nonetheless, the truth that Cirrus reported a a lot stronger year-over-year improve within the prime line signifies that it’s getting extra income from every unit of the iPhone that it sells. That may be attributed to Cirrus’ diversification past audio chips into different niches, reminiscent of energy administration modules, digital camera controllers, and haptics.
The corporate additionally reported a year-over-year improve of 25% in earnings to $2.25 per share, pushed by an enchancment of 90 foundation factors in its non-GAAP (usually accepted accounting rules) gross margin to 52.2%.
So, chances are you’ll be questioning why the inventory fell regardless of reporting wholesome will increase in each income and earnings. The issue with Cirrus’ newest quarterly report was its steering.
The corporate expects fiscal Q3 income to land between $480 million and $540 million, the midpoint of which comes out to $510 million. That will translate right into a year-over-year decline of just about 18%, as the corporate generated $619 million in income in the identical interval final 12 months. Nonetheless, Cirrus administration factors out that its steering “displays one much less week of income, as FY24 was a 53-week fiscal 12 months.”
On the similar time, this will not be the one purpose why the corporate’s income is ready for a double-digit decline.
Is poor iPhone demand weighing on the chipmaker?
We’ve got already seen that Cirrus’ income within the earlier quarter elevated by double digits, although Apple’s iPhone gross sales throughout the identical quarter elevated within the low single digits. Nonetheless, Cirrus’ dependency on only one buyer for such an enormous chunk of its income might weigh on its efficiency, at the very least within the quick run.
A Reuters report factors out that the transport instances for Apple’s iPhone 16 Professional fashions are a lot shorter than final 12 months. Extra particularly, the typical transport time for the iPhone 16 Professional this 12 months stands at 14 days, down from 24 days for final 12 months’s mannequin. The iPhone 16 Professional Max is witnessing a 19-day transport time as in comparison with the iPhone 15 Professional Max’s 32 days.
Apple analyst Ming-Chi Kuo of TF Worldwide Securities factors out that pre-orders of the iPhone 16 Professional and Professional Max fashions have been down 27% and 16%, respectively, this 12 months. These components might have led Apple to tug again its manufacturing plans for the present quarter, which is normally a robust one, contemplating that it coincides with the vacation season.
This might be another excuse why Cirrus’ prime line is ready to contract considerably from the year-ago interval, when it reported a 5% improve in income for the December quarter. Nonetheless, savvy traders would do effectively to take a look at the larger image.
One purpose why gross sales of the newest iPhone fashions are off to a gradual begin is due to the gradual rollout of the corporate’s Apple Intelligence suite of artificial intelligence (AI) options. A number of of Apple’s AI options will solely be made accessible to clients subsequent 12 months, which could possibly be the explanation why clients usually are not speeding out of the gate to improve their iPhones.
Nonetheless, the presence of an enormous variety of iPhones in an improve window ought to ideally help Apple ship more iPhones going forward, particularly due to the generative AI options that the corporate is ready to supply. In spite of everything, shipments of generative AI smartphones are anticipated to extend at an annual charge of 78% by means of 2028, per IDC, hitting 912 million models on the finish of the forecast interval.
Provided that Apple is the world’s second-largest smartphone firm and the generative AI smartphone market is at the moment in its early phases of progress, it ought to have the ability to get its act collectively and witness an enchancment in iPhone gross sales sooner or later. That ought to rub off positively on Cirrus Logic as effectively, contemplating its shut ties to Cupertino.
That is why traders would do effectively to maintain this semiconductor stock on their watch lists. Cirrus is buying and selling at a pretty 20 instances earnings proper now. It appears able to regaining its mojo due to the large alternative current within the generative AI smartphone market and its relationship with Apple — two components that might ship its inventory on a bull run as soon as once more.