Smartphone Exposure And Escalating Tensions Will Compress Margins

Key Takeaways

• Heavy reliance on major smartphone customers and slow diversification leaves the company vulnerable to fluctuating device demand and stalled long-term growth.
  
• Rising industry competition, higher input costs, and increasing R&D spending threaten profit margins and future cash flow.
  
• Diversification into new markets, robust innovation, and AI investments position Cirrus Logic for long-term growth, reduced reliance on smartphones, and resilience against market shifts.

Catalysts

A fabless semiconductor company, develops mixed-signal processing solutions and audio products in China, the United States, and internationally.

• Increasing dependence on the smartphone market, especially through major customers like Apple, leaves Cirrus Logic highly exposed to any slowdown in device sales or changes in customer design cycles-when consumers extend device lifespans due to sustainability concerns, demand for Cirrus Logic's components deteriorates and directly impacts long-term revenue stability.
  
• Intensifying competition from Asian semiconductor manufacturers and broader industry commoditization may accelerate price erosion, limiting Cirrus Logic's ability to sustain premium pricing on audio and mixed-signal solutions and resulting in shrinking gross margins over time.
  
• Escalating geopolitical tensions and protectionist policies threaten global supply chain resilience; with manufacturing complexity rising and wafer supply agreements becoming burdensome, Cirrus Logic faces the risk of higher input costs, inventory imbalances, and decreased manufacturing flexibility, all of which would compress net margins.
  
• Despite efforts at diversification, progress in non-smartphone verticals like automotive, PC, and industrial remains nascent, with management admitting these revenue streams are not yet meaningful-if new design wins fail to ramp as quickly or at scale, long-term earnings growth could stagnate.
  
• As research and development expenses continue rising to keep pace with technological advancements in audio, AI, and mixed-signal ICs, Cirrus Logic's operating expense base is likely to outgrow incremental topline gains, driving down profit margins and constraining free cash flow generation.

Cirrus Logic Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Cirrus Logic compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Cirrus Logic's revenue will decrease by 0.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 18.1% today to 15.9% in 3 years time.
• The bearish analysts expect earnings to reach $301.1 million (and earnings per share of $5.67) by about August 2028, down from $350.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.2x on those 2028 earnings, up from 15.2x today. This future PE is lower than the current PE for the US Semiconductor industry at 29.1x.
• Analysts expect the number of shares outstanding to decline by 3.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.23%, as per the Simply Wall St company report.

Cirrus Logic Future Earnings Per Share Growth

Risks

• Cirrus Logic is demonstrating strong product innovation and clear leadership in advanced audio and mixed-signal solutions, having achieved record quarterly revenue and expanded its reach with new 22-nanometer smart codecs and amplifiers, which suggests potential for ongoing growth in revenue and gross margins over the long-term.
  
• The company is executing on a robust diversification strategy, expanding outside its flagship smartphone business into laptops, automotive, professional audio, and imaging markets, with several new design wins and shipments that could reduce dependence on any single customer and support long-term top-line growth and earnings stability.
  
• Cirrus Logic's success in penetrating the mainstream laptop market and securing design wins with all top 6 OEMs highlights growing traction in a fast-evolving segment, providing an incremental revenue stream that could offset cyclical pressure in smartphones and drive ongoing cash flow improvement.
  
• The strong demand for Cirrus Logic's components in smartphones, particularly in camera controllers that are shipping earlier in the supply chain, demonstrates secular content-per-device growth, which could underpin higher annual revenues even with seasonality shifts.
  
• Continued investment in AI enabling technologies and ultra-low-power solutions positions Cirrus Logic to capture future opportunities in voice-centric devices and edge AI, potentially expanding its addressable market and mitigating margin compression risk as industry trends evolve, supporting sustained net income growth.

Valuation

• The assumed bearish price target for Cirrus Logic is $90.84, which represents two standard deviations below the consensus price target of $123.33. This valuation is based on what can be assumed as the expectations of Cirrus Logic's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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 $90.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $301.1 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 10.2%.
  
• Given the current share price of $103.82, the bearish analyst price target of $90.84 is 14.3% lower.
  
• 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.