CRUS - Cirrus Logic Hit Hard On Rumored Apple Design Change But The Long-Term Story Remains Intact

2023-04-13 12:45:12 ET

Summary

• Cirrus shares dropped more than 12% on rumors that Apple has altered its design plan for the iPhone 15, potentially taking away a content growth opportunity for Cirrus.
• With or without solid-state buttons for the iPhone 15, Cirrus has a multiyear content growth opportunity across audio, camera, haptic, and power products with Apple, Android OEMs, and non-phone customers.
• Mid-single-digit revenue and FCF growth and mid-20% OPMs can support a fair value above $100.

Reliance on Apple ( AAPL ) has long been a mixed blessing for semiconductor companies like Cirrus Logic ( CRUS ). While iPhone volumes are robust and Apple likes to raise the bar on device performance and features, leading to content/ASP growth opportunities, Apple can likewise be a brutal customer to serve, with many companies ending up on the wrong side of price negotiations or finding themselves designed out of future models (in favor of either rival suppliers or internally-sourced components).

Recent rumors of a change to Apple’s plans for the iPhone 15 have sent Cirrus shares down more than 10%, and Cirrus could see an important content/mix growth opportunity delayed or disappear altogether. By the same token, though, the content/mix growth story with Apple remains healthy overall and Cirrus continues to have opportunities to grow outside of the Apple ecosystem. Up over 25% since my last update (even with the recent decline), and handily outperforming the semiconductor index over that time, I do still see value in the shares, though it’s not as easy of a call as before.

A Rumored Change In A Rumored Change Drives A Double-Digit Drop

Cirrus dropped more than 12% on April 12 in response to a report from TF International Securities analyst Ming-Chi Kuo that Apple had changed its mind about altering the design of the iPhone 15 to replace certain buttons (volume and power) with solid-state buttons that would have used controller chips supplied by Cirrus. China-based AAC Technologies ( AACAY ), which supplies haptic technology to Apple, was also down more than 10% on the rumor.

Kuo gave few details beyond “unspecified technological issues”, and it’s worth noting that Kuo was also the first to share rumors of the move from physical buttons to solid-state buttons. Apple has said nothing either way about the design of the iPhone 15, as is typical, and neither has Cirrus (also typical). While Kuo has been a reliable reporter on Apple-related news in the past, he has also been wrong about rumored products and design changes (as has, and will be, every analyst who covers any company long enough).

Whether or not this shift to solid-state buttons was part of the initial plan for the iPhone 15, it would be consistent with an overall shift toward more haptic components, and likewise consistent with the bull thesis that Cirrus stands to benefit from further content growth at Apple in areas like advanced audio (next-gen codecs), camera controllers, haptics, and power management.

Such a product would have offered near-term content growth opportunities for Cirrus, and I’d note that Cirrus saw 15% year-over-growth at Apple in the fourth quarter, comfortably ahead of underlying volume. If this switch is indefinitely tabled at Apple, not only would that take away some near-term revenue growth momentum at Apple (which contributed nearly 90% of Cirrus’s revenue in the last quarter), but it would also create some inventory write-down risk.

Longer-Term Opportunities, But Still Short-Term Challenges

Cirrus delivered better-than-expected revenue in the fourth quarter, in large part due to that strength in Apple revenues, and guidance for March was generally in line with prior expectations (and stronger than the guidance from other Apple suppliers like Knowles ( KN ) and Qorvo ( QRVO ) at +2% quarter over quarter).

Since then there has been mixed development in the smartphone market. Demand and volumes for iPhones seem to be tracking to my prior expectations, while Android handsets, particularly those for the Chinese market, seem to be tracking a little better in volume terms, but a little weaker in terms of mix (weaker high-end, stronger low/medium-end). Industry-wide inventory levels are still high, though, and I don’t think the sector is out of the woods yet.

With that, I do see some risk from weaker stereo speaker and advanced codec attach rates, but growing sales of multi-camera models should offer some offset from camera controllers. I’m also curious to see if Cirrus has been winning more fast-charging business with Android OEMs.

I do still see a risk that Apple iPhone units could underperform Android units in 2023, but I wasn’t looking for especially strong revenue growth in FY’24 anyway. I do also see growth opportunities from new product launches over the next couple of years, including next-gen codecs, camera controllers, haptic, and power management products.

Cirrus continues to pursue worthwhile growth opportunities both within and outside of the Apple ecosystem. The company has done well securing slots outside of iPhones (including AirPods), and I expect that to continue across the company’s audio, camera, haptics, and power capabilities. Content growth with Android OEMs remains a worthwhile opportunity (particularly in camera controllers and power management), as does growth outside of smartphones (wearables, PCs, etc). Still, the reality is that Apple is and will continue to be a major customer for Cirrus and the stock will remain sensitive to rumors about Apple design/content choices.

The Outlook

In the wake of December quarter results I modestly increased my FY’23 revenue estimate and lowered my FY’24 estimate by an almost equal amount. I expect revenue growth to accelerate in FY’25 as new products hit their commercial ramps, and I’m still expecting long-term annualized revenue growth of around 5%.

I’ve also modestly reduced my operating margin assumptions for FY’24, but I expect improvement in FY’25 and I think the company can regain 25%-plus non-GAAP operating margin in a few years’ time. Long term, I believe high-teens adjusted free cash flow margins are attainable, supporting a mid-single-digit long-term FCF growth rate (consistent with my prior expectations).

Semiconductor stock multiples are starting to recover, but I also still believe that a double-digit discount is appropriate here given Cirrus’s reliance on Apple as a customer. While I think a 2.9x multiple on FY’24 revenue is fair now, and supports a fair value near $105, if sentiment improves for the sector as a whole later in 2023, I think a fair value in the high $110’s (with a 3.25x forward multiple) comes into play. I also believe the shares are undervalued on the basis of discounted cash flow, with an annualized potential return close to 10%.

The Bottom Line

Lackluster smartphone volumes do remain a risk, as does elevated exposure to Apple, but I believe those risks are tempered by healthy content/mix growth opportunities both within and outside of the Apple ecosystem. Diversification beyond smartphones is a multiyear work in progress, but I’m bullish on the company’s power management opportunities. I also see a modest chance that Apple could look to acquire the company.

All told, I am still bullish on the stock, even with the potential hit to near-term revenue growth if this iPhone 15 rumor is accurate. While I don’t think it’s the best play today in semiconductors, I see enough upside to merit consideration from investors who want exposure to a smartphone market that is likely at or near its bottom.

For further details see: