Cirrus Logic: The Outlook Gets More Hazy (NASDAQ:CRUS)

Cirrus Logic (NASDAQ:CRUS) gave the bulls reason to be optimistic in the second half of 2022 after a weak first half, but that has changed in the last few weeks. The stock appeared to be in an uptrend, but that changed when support failed to hold. While CRUS is doing well in some aspects, there are several issues that may cause people to take a step back. Why will be covered next.

The uptrend is no more

The chart below shows how the stock’s fortunes have undergone important changes. In the first half of 2022, the stock trended lower. In fact, the stock set a series of lower lows, which can be connected to form a descending trendline. Note also how the stock topped out in the $85-90 region, a sign resistance can be found in this region. The stock continued its decline, setting new lows along the way, until early July when it went on to rally for the whole month.

Up until fairly recently, the stock seemed to be moving higher in what appeared to be an ascending channel with an upper trendline connecting a series of higher highs and a lower trendline connecting a series of higher lows, both running parallel to one another The stock kept rising within the channel until it got stopped in its tracks in early August when it was unable to overcome resistance in the aforementioned $85-90 region.

The stock fell back to support, which initially succeeded in halting the slide with the stock respecting the boundaries imposed by the ascending channel. However, after a number of attempts, the stock broke through support in late September. Note how the stock retested support, only to find out what was support has become resistance. The stock continued its decline, hitting the low of the year on October 12. It’s now down 32% YTD.

The presence of an ascending channel gave the bulls reason to believe the stock had left behind its struggles in the first half, but the break through support has invalidated the chart pattern. The chart patterns are no longer bullish and could even be leaning bearish. While there haven’t been any new highs in quite some time, the same cannot be said of the lows. The lows continue to go lower, a bearish sign. The recent price action could at the very least put doubt in some people’s minds as to whether they should be long CRUS.

What is causing problems for CRUS

The recent reversal of the stock’s fortunes have coincided with industry reports suggesting demand for the latest iPhones from Apple (AAPL) is not as good as previously thought. Keep in mind that AAPL accounted for as much as 79% of sales at CRUS in FY2022, down somewhat from the year before when AAPL contributed 83% of total sales according to the most recent Form 10-K.

While CRUS is attempting to diversify, it remains heavily exposed to the smartphone market, particularly the high end of the market and iPhones in particular. Demand in the smartphone market has been in decline recently. For instance, according to Canalys, smartphone shipments declined by 9% YoY in Q2 2022. Most smartphone OEMs have seen sales decline as a result.

In contrast, AAPL outperformed and was able to gain market share despite a shrinking market. AAPL’s share of the smartphone market rose to 17% in Q2 2022, up from 14% in Q2 2021. CRUS benefited from this with its strong ties to AAPL. Up until fairly recently, AAPL was expected to keep outperforming with strong demand anticipated for the recently released iPhone 14.

There were even reports of AAPL increasing production of iPhones in anticipation of strong sales. However, there are a growing number of reports suggesting sales of the latest iPhones are not going as well as anticipated. AAPL itself seemed to have confirmed the rumors when it reportedly backed off earlier plans to increase iPhone production. CRUS has naturally been affected by this turn of events.

CRUS is still doing well in spite of the stock’s decline

Recent events notwithstanding, it’s worth mentioning that quarterly earnings have held up thus far at CRUS. While some of its peers in the semiconductor industry have blamed weakness in the smartphone market for disappointing results, CRUS itself has yet to see much impact from declining smartphone sales.

For instance, Q1 revenue increased by 42% YoY to $393.6M, a record high for the first quarter. GAAP EPS increased by 138% YoY to $0.69 and non-GAAP EPS increased by 107% YoY to $1.12. CRUS finished the quarter with cash and cash equivalents of $454M on its balance sheet. CRUS has no debt to worry about. The table below shows the numbers for Q1 FY2023.

(GAAP)	Q1 FY2023	Q4 FY2022	Q1 FY2022	QoQ	YoY
Net sales	$393.639M	$489.972M	$277.253M	(19.66%)	41.98%
Gross margin	51.5%	52.8%	50.5%	(130bps)	100bps
Income from operations	$54.276M	$107.865M	$19.103M	(49.68%)	184.12%
Net income	$39.707M	$96.414M	$17.209M	(58.82%)	130.73%
EPS	$0.69	$1.64	$0.29	(57.93%)	137.93%
(Non-GAAP)
Net sales	$393.639M	$489.972M	$277.253M	(19.66%)	41.98%
Gross margin	51.5%	52.9%	50.6%	(140bps)	90bps
Income from operations	$83.413M	$135.935M	$37.085M	(38.64%)	124.92%
Net income	$64.544M	$117.706M	$32.242M	(45.17%)	100.19%
EPS	$1.12	$2.01	$0.54	(44.28%)	107.41%

Click to enlarge

Source: CRUS Form 8-K

Guidance calls for Q2 FY2023 revenue of $450-490M, an increase of 1% YoY at the midpoint. Keep in mind that CRUS is going up against tough comps in the next few quarters, in part due to seasonality. Q2 FY2022 revenue, for instance, increased by 68% QoQ.

(GAAP)	Q2 FY2023 (guidance)	Q2 FY2022	YoY (midpoint)
Revenue	$450-490M	$465.9M	0.88%
Gross margin	49-51%	50.5%	(50bps)

Click to enlarge

While management acknowledges weakness in the smartphone market, it reiterated that CRUS is mostly exposed to the more robust part of the smartphone market. From the Q1 earnings call:

[W]e are shipping to the slice of the market that seems to have a little more robustness around it and we are all reading the same signs in terms of what’s happening in China as it relates to Android and also the rest of the world.

And as the macro situation develops, we will keep an eye. But most of our focus has been primarily driven by the shipments that we have made into the high end of the market.

A transcript of the Q1 FY2023 earnings call can be found here.

Expectations have gone down

Nevertheless, earnings expectations have been revised lower for CRUS. Consensus estimates now call for revenue of $469M and non-GAAP EPS of $1.45 in Q2 FY2023, much less than the $1.82 in Q2 FY2022. Consensus estimates put FY2023 non-GAAP EPS at $5.15-5.73, down from $6.90 in FY2022.

Earnings are expected to decline and this is reflected in CRUS’ valuations. CRUS is not expensive per se, but the concern is that it could become so if earnings keep declining. For instance, CRUS has a trailing P/E of 11, but this jumps to 18 on a forward basis. The stock is valued at 2.26 times book value. The table below shows some of the multiples CRUS trades at.

	CRUS
Market cap	$3.61B
Enterprise value	$3.33B
Revenue (“ttm”)	$1,897.8M
EBITDA	$468.2M
Trailing P/E	10.86
Forward P/E	17.72
PEG	0.17
P/S	1.94
P/B	2.26
EV/sales	1.76
Trailing EV/EBITDA	7.12
Forward EV/EBITDA	7.84

Click to enlarge

Source: Seeking Alpha

Investor takeaways

Sentiment towards CRUS has taken a turn for the worse. As recently as early August, the stock was only down 5% or less, vastly outperforming the semiconductor sector. Demand in the smartphone market has fallen, but it was believed that AAPL would hold up, giving CRUS a degree of resilience since most of its sales are from AAPL. CRUS was seen to be relatively safe from all the turmoil that continues to roil global markets. As goes AAPL, so does CRUS.

However, recent events have caused people to question those assumptions. CRUS is seen to be more vulnerable than first thought and the stock has suffered as a result. Sales of iPhones have held up well considering the state of the smartphone market, but there are growing signs the deterioration in the global economy is starting to impact consumer spending.

Governments and central banks are no longer providing stimulus the way they did in the last two years, which, together with high inflation, means people have less to spend on such consumer items as smartphones. iPhones and other gadgets from AAPL have done better than others, but it is unrealistic to think reduced spending power on the part of the consumer will not have a negative effect on sales of consumer goods. It may take a while before it happens, but it will get to that point as long as the economy continues to get worse over time.

The stock has not fallen as much as other semis in 2022, but the gap is no longer as wide as it was a few months ago. At the same time, the charts are no longer leaning bullish as they once were. The stock continues to set new lows, the latest just one week ago. It does not inspire confidence if a stock continues to reach new lows. Arguing in favor of CRUS has a higher hurdle to cross with all of this going on.

I am neutral on CRUS. CRUS has done relatively well considering the circumstances. AAPL has yet to experience a real deterioration in quarterly earnings or guidance, which explains the relative outperformance of its stock and that of CRUS by extension. At the same time, the outlook gas gotten more hazy recently. The iPhone may not be as resilient to headwinds as believed. Consensus estimates predict a looming slowdown for CRUS. CRUS may be a case of waiting for the other shoe to drop.

With the way things are going, especially in terms of the global economy, it’s likely only a matter of time before AAPL gets hit by a weakening economy and weaker consumer spending. If or when that happens, CRUS is likely to sell off the way it has yet to do so, unlike other semis. The reality is that the global economy is getting worse and not better. As long as this continues, CRUS is not in the safe zone and should not be treated as such.