Expanding Into Laptops And Mixed-Signal Products Will Drive Future Opportunities

Key Takeaways

• Expansion into high-performance mixed signal products and new markets like laptops indicates strong potential for revenue growth and diversification beyond smartphones.
  
• Strategic R&D investments and a share repurchase program aim to drive innovation, enhance margins, and elevate shareholder value.
  
• Heavy reliance on major customers and rising supply chain and inventory costs could lead to revenue volatility and margin pressures.

Catalysts

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

• Cirrus Logic is expanding its high-performance mixed signal product offerings in smartphones, exemplified by the next-generation custom boosted amplifier and the first 22-nanometer smart codec, which are expected to provide substantial revenue streams over multiple smartphone generations. (Impacts: Revenue, earnings)
  
• The company sees a favorable mix shift with their camera controller product line, indicating potential for increased system performance and advanced camera features, which could enhance revenue and margins in the smartphone segment. (Impacts: Revenue, net margins)
  
• Cirrus Logic's strategic R&D investments in advanced power, sensing, and battery-related technologies aim to diversify their product base and capture new market opportunities, likely improving revenue growth and product diversification. (Impacts: Revenue, product diversification)
  
• The company's successful penetration into the laptop market, securing high-volume mainstream design wins with products like power converters and PC codecs, indicates promising future growth and an expanded revenue base outside of smartphones. (Impacts: Revenue, earnings)
  
• Cirrus Logic's ongoing share repurchase program aims to return capital to shareholders, potentially enhancing earnings per share and providing a long-term benefit to shareholders. (Impacts: Earnings per share)

Cirrus Logic Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cirrus Logic's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.2% today to 17.4% in 3 years time.
• Analysts expect earnings to reach $344.7 million (and earnings per share of $6.49) by about January 2028, up from $327.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.1x on those 2028 earnings, up from 16.4x today. This future PE is lower than the current PE for the US Semiconductor industry at 31.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.95%, as per the Simply Wall St company report.

Cirrus Logic Future Earnings Per Share Growth

Risks

• Cirrus Logic's reliance on specific customers, especially large ones, could pose revenue risks if those customers make changes to their product launch cycles or preferred suppliers. This could lead to revenue volatility.
  
• The company's expansion strategy into new markets like laptops is still in the early stages and might not achieve expected revenue growth if execution or market conditions change.
  
• Inventory levels are increasing due to commitments with suppliers such as GlobalFoundries. If market demand doesn't match inventory levels, this could impact net margins through write-downs or inefficient use of capital.
  
• Supply chain costs have increased, potentially impacting gross margins if the company is unable to pass these costs onto customers.
  
• Changes to tax regulations or non-compliance with existing commitments might lead to higher-than-expected tax rates, which could impact net earnings.

Valuation

• The analysts have a consensus price target of $130.0 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 $105.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.0 billion, earnings will come to $344.7 million, and it would be trading on a PE ratio of 25.1x, assuming you use a discount rate of 8.0%.
• Given the current share price of $100.92, the analyst's price target of $130.0 is 22.4% 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.