Smartphone Dependence And Supply Chain Woes Threaten Profit Margins And Growth

Key Takeaways

• Cirrus Logic's heavy reliance on smartphone sales for high-performance mixed-signal components presents a risk if demand drops or competition grows.
  
• Diversification into the PC and laptop markets carries execution risks and could affect profits if these sectors do not expand as anticipated.
  
• Cirrus Logic's strategic focus on its smartphone audio business, coupled with expansion and diversification efforts in mixed-signal functionality and power technologies, aims at broadening market reach and enhancing profitability.

Catalysts

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

• Cirrus Logic's significant reliance on smartphone shipments, particularly for high-performance mixed-signal (HPMS) components, could pose a risk to future revenue growth if smartphone market demand weakens or if competition intensifies, potentially affecting the company's revenue.
  
• The company's entrance into the PC market and investments in new markets such as laptops, while promising, may take time to materially contribute to revenue. This diversification strategy faces execution risks and could impact profitability if these new markets do not grow as expected or if Cirrus Logic fails to capture significant market share.
  
• The anticipated ramp-up of next-generation audio components and expansions in high-performance mixed-signal (HPMS) functionality require successful execution. Any delays or lower-than-expected adoption by customers could affect revenue forecasts and growth margins.
  
• Ongoing higher supply chain costs associated with new product ramps indicate that gross margins may continue to be under pressure, potentially affecting net margins if these costs are not managed effectively or if they exceed expectations.
  
• Cirrus Logic's strategy of increasing investment in product development to drive long-term growth may impact net earnings in the short to medium term, especially if the payoff from these investments takes longer to realize or if the R&D expenditure does not translate into proportionate revenue growth.

Assumptions

• Analysts are assuming Cirrus Logic's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.3% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $311.5 million (and earnings per share of $5.34) by about August 2027, up from $301.1 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 29.9x on those 2027 earnings, up from 25.1x today. This future PE is greater than the current PE for the US Semiconductor industry at 28.9x.
• Analysts expect the number of shares outstanding to decline by 2.37% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.99%, as per the Simply Wall St company report.

Risks

• Cirrus Logic's commitment to maintaining leadership in its core flagship smartphone audio business and its launch of next-generation components may lead to significant performance, efficiency, and system cost improvements, potentially boosting revenue from smartphone manufacturers.
  
• The company's expansion into high-performance mixed-signal functionality in smartphones, with anticipated favorable content in new smartphone introductions, could increase addressable market size and diversify revenue sources, possibly enhancing profitability.
  
• Investments in advanced power and battery-related technologies, aimed at system side power delivery, high efficiency charging, and battery management, may lead to product diversification and contribute to Cirrus Logic’s long-term revenue growth.
  
• Design wins across the top 6 laptop OEMs worldwide and opportunities in new markets outside of smartphones, such as the laptop business, signal potential growth in market share and content per device, ultimately improving revenue streams.
  
• Successful deployment of new digital to analog converters and an ultra-high-performance audio codec in professional and prosumer audio segments, complemented by strong customer feedback, could open up additional high-margin revenue opportunities.

Valuation

• The analysts have a consensus price target of $150.83 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 $175.0, and the most bearish reporting a price target of just $110.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.1 billion, earnings will come to $311.5 million, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $141.73, the analyst's price target of $150.83 is 6.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.