Financially conservative Cirrus Logic (CRUS) could experience significant stock price increases coming with the next major up-leg of the stock market. We explain why. With several growth vectors aligned with coming growth markets and its long-term commitment to uninterrupted development, historically Cirrus has produced, and continues to produce, timely superior products. Although the development and implementation process often takes years, it seems that Cirrus’ latest crop of technology is posed for adding immediate and longer-term revenue.
Cirrus Logic, a semiconductor company, maintains a fabless model. Its wide variety of differing products and relative market size mandate this approach. Financially, its risks remain limited to its employment and building costs. The company is debtless, only borrowing when needed for major capital needs. Its debtless culture developed some decades in the past, when during the late 1990s it almost experienced bankruptcy. The balance sheet shows approximately $600 million in cash, with yearly revenue near $1.5 billion. At 50%+ gross margins, Cirrus could lose half of its revenue before it would begin burning cash.
Cirrus’ produces uniquely custom and semi-custom products for interfacing the digital and analog worlds. Its technology optimizes low power usage, small size, lower cost and low latency. Cirrus provides Apple (AAPL) with its audio and sound technology. Coming later this year, Cirrus will likely be included in Apple’s iPhone with a new lucrative technology outside of audio. The company also provides audio technology for Samsung (OTC:SSNLF) and most of the top ten Android OEMs around the world. Its footprint inside of Android products is expected to grow significantly over the next few years, primarily with amplifiers and haptic devices.
Cirrus continues to add employment openings. Most of the newly placed openings are targeted specifically. Many include responsibilities for rolling out new products in growth vectors. These include foundry operations management, physical design, haptics product development, amplifier development and codec design. The new openings advanced to the 70s range, a range that historically signals slight employment growth. In the past few years, Cirrus slowly decreased its employment without compromising product development. With expected growth, that changed in the past few months. We view this as bullish.
The Growth Vectors
We have written in the past about several major growth vectors. The company expects Android growth from amplifiers and haptics (touch-feeling simulation) devices across a broad spectrum of OEMs. Within tablets and laptops, Cirrus expects increased content over CY-2020. A new closed-controller outside of audio remains on track for ramping this calendar year. Other non-audio products are in line to begin shipping in CY-21. With these added to a super-cycle fueled though a 5G sector transition, Cirrus is targeted for growth.
China Back On-line
While the world is abuzz in a virus crisis, products Cirrus Logic manufactures will experience reduced demand. But China, a key manufacturing location, is coming back on-line. Recent headlines such as: “Foxconn claims it has secured enough workers for seasonal demand,” After nearly 2 months, Wuhan (the epicenter of the pandemic in China) announced today that it would be loosening the lockdown,” and “Apple’s 5G iPhones currently on schedule – Bloomberg” strongly point that life, including manufacturing, is returning to some normal. In time, the rest of the world will follow.
We include the following self-made chart using TradeStation.
This long-term chart shows clear resistance and support levels at $85-$90 and $50 respectively. Classical long-term pattern moves might suggest Cirrus could trade at $120-140. Remember, this is long term. Short term, we expect volatility in both directions. We sold some shares in the $60-70 range and repurchased many of the shares. Waiting for significant upside, we sold June calls ranging in strike price from $55 to $75. This was designed as a hedge through what we believe will be the worst of the volatility period of time.
The Jet Fuel And Nitro
The United States Government Fed and government actions include economic support worth $6 trillion – yes, $6 trillion. Of the $6 trillion, $4 trillion is from the Federal Reserve Bank. $2 trillion is stimulus which will be charged against the national debt. This article summarized the plan.
- Longer-term 0% interest rates
- Open-ended Quantitative Easing
- Lending to securities firms
- Backstopping money market mutual funds
- Repo purchasing
- Direct bank lending
- Direct lending to major corporate employers
- Main Street Business Lending Program
- Fed-supported lending to households, consumers and small businesses
The $2 trillion Congressional package contains:
- Loans and guarantees to businesses, state and local governments: $500 billion.
- $50 billion for passenger airlines
- $8 billion for cargo carriers
- $17 billion for “businesses critical to maintaining national security.”
- Small businesses, including $350 billion in loans for companies with 500 employees or fewer
- Emergency unemployment insurance up to $600 per week
- Transportation, education, medical research
- Tax postponements
Did we miss anyone or anything? Truly, there are many unknowns, but this is huge. Many claim it isn’t enough, but for airplanes, it looks like jet fuel; to a funny car, it’s nitro. We wonder if, on the other side of this uncertainty, the stimulus becomes fuel. Our experience with markets certainly suggests this. We remember well the October crash of the ’80s. Please take a look at the market reaction after 2008.
Some Investment Thoughts
We recently have written several articles about several of our investment’s ability to survive through this uncertainty. We included the discussion about stimulus with one of our favorite growth stocks, Cirrus Logic. Is it possible that the company’s growth vectors, coupled with a major super-cyclical now followed by general market economic stimulus, create a super-charged result? We don’t know, but the three will line up at some future time. Powers of three such as found in this lineup usually do super-charge the catapult.
We suspect that there is still a strong amount of uncertainty left to wade through and expect a reasonably sharp drop in the market before it makes any real move upward. But in time, is it possible that Cirrus acts more like a rocket soaring skyward than a glider drifting lower? On the backside of the year, we suspect an upward trajectory and are planning for such. Always remember, Cirrus Logic isn’t for the faint of heart.
Disclosure: I am/we are long CRUS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.