CRUS shares rise more than 16%
Cirrus Logic (CRUS) shares rose 16.4% to close at $32.54 on January 28, 2016, a day after the company released its fiscal 3Q16 earnings and beat analyst estimates. This share price movement stands out from other Apple (AAPL) suppliers, including Qualcomm (QCOM), whose shares fell 8%.
CRUS shares rose even though the company’s fiscal 4Q15 guidance missed analysts’ expectations. Let’s look at what improved investors’ confidence in the company’s future growth prospects.
Cirrus’s dependency on Apple
Cirrus Logic earns 75% of its revenue from Apple and 11% from Samsung (SSNLF). This fact makes the headphone supplier strongly depend on Apple sales. At the start of January, the company lowered its fiscal 3Q16 guidance as Apple scaled back iPhone 6s and 6s Plus production.
Recently, Apple reported its slowest sales growth at less than 1% year-over-year since the iPhone launched in 2007 due to a slowdown in the Chinese (FXI) market. It expects to report its first decline in iPhone sales of 10%–15% year-over-year in the March 2016 quarter. Amid lackluster sales of the iPhone 6S comes a new hope that the upcoming iPhone 7, which should launch in September 2016, may revive sales.
Cirrus Logic has been selected to supply noise cancellation headphones for the iPhone 7. The company expects these headphones to drive sales by more than 15% in fiscal 2017. This news earned the company an upgrade from an industry analyst.
The company’s shares were driven by a rating upgrade from Oppenheimer analyst Rick Schafer. He changed his rating from “perform” to “outperform” with a 12-month target price of $40. This target suggests a potential increase of 25% from the current stock price, which is hovering around $32. Pacific Crest analyst John Vinh has set a similar price target for the stock, but he rated it “overweight.”
Oppenheimer’s Rick Schafer believes the additional smart codec socket in the iPhone 7 will increase Cirrus Logic’s content by 60% compared to its content in the iPhone 6s. In dollar terms, the average selling price of the content in the iPhone 7 should rise by $2 to $5.50 versus the $3.50 used in the iPhone 6s.
Considering that iPhone 7 unit sales remain flat, Cirrus Logic will still earn more than $4 per unit in 2017 since its content will increase.
Schafer believes the headphones will sell as an “in-box” feature while John Vinh believes they’ll be an “out-of-the-box” purchase. If Schafer ends up being right, Cirrus Logic should benefit.