Geographical And Mixed-Signal Investments Will Open Future Markets

Key Takeaways

• Geographical diversification in the supply chain aims to reduce risks and maintain/improve margins amidst trade and tariff challenges.
  
• Investments in mixed-signal technologies and market expansion are expected to diversify revenue and boost growth across multiple sectors.
  
• High customer dependency, inventory risks, and execution challenges in new markets could impact Cirrus Logic's revenue stability, margins, and growth prospects.

Catalysts

A fabless semiconductor company, develops low-power high-precision mixed-signal processing solutions in China, the United States, and internationally.

• Cirrus Logic is investing in geographical diversification of its supply chain to mitigate potential trade and tariff impacts, which could help maintain or improve gross margins by reducing supply chain risks.
  
• The company's strategy of maintaining leadership in the flagship smartphone audio business with innovative products like the boosted amplifier and smart codec is expected to sustain and potentially increase revenue from smartphones in future years.
  
• Significant investments in high-performance mixed-signal areas, including camera controllers and advanced battery technologies, suggest potential future revenue diversification and expansion into new markets.
  
• Cirrus Logic's success in securing a high-volume mainstream design win and expanding its direct engagement with PC OEMs is anticipated to drive significant revenue growth in the laptop market.
  
• The company's commitment to new products in the professional audio, automotive, industrial, and imaging markets is expected to contribute to future revenue and gross margin expansion through sustained differentiation and enhanced performance of these products.

Cirrus Logic Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cirrus Logic's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.5% today to 16.6% in 3 years time.
• Analysts expect earnings to reach $342.2 million (and earnings per share of $6.22) by about May 2028, up from $305.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.4x on those 2028 earnings, up from 17.2x today. This future PE is greater than the current PE for the US Semiconductor industry at 22.5x.
• Analysts expect the number of shares outstanding to decline by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.18%, as per the Simply Wall St company report.

Cirrus Logic Future Earnings Per Share Growth

Risks

• The current macroeconomic and trade environment, including potential impacts from tariffs, could pose uncertainties and risks that may affect future revenue and profit margins.
  
• Cirrus Logic's significant revenue concentration with its largest customer (89% of fiscal year '25 revenue) exposes the company to risks related to customer dependency, which could impact revenue stability and earnings.
  
• High inventory levels, notably with 138 days of inventory, could lead to risks of write-downs and affect gross margins negatively if demand forecasts are not met.
  
• Increased investments in R&D and geographic diversification could strain operating expenses and net margins if anticipated revenue growth does not materialize in the projected time frame.
  
• Execution risk in new market expansions, like automotive and laptops, where product life cycles and adoption rates can be slow, could delay anticipated revenue diversification and growth.

Valuation

• The analysts have a consensus price target of $120.617 for Cirrus Logic based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $140.0, and the most bearish reporting a price target of just $80.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $342.2 million, and it would be trading on a PE ratio of 23.4x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of $98.72, the analyst price target of $120.62 is 18.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.