You’ll often hear about “derivative” trades or alternative ways that traders are taking advantage of a hot sector or new technology without investing directly in the business itself, which might be overbought or played out.
Investors will sometimes look to related companies that have yet to be recognized by the masses or have not yet fully profited from a breakthrough technology.
When the internet was gaining popularity in the 1990s, hundreds of companies were riding the wave of this new shift in the way we interacted. The internet was not just a new cool technology, it changed the way we lived and it had (has) the ability to act as an extremely powerful catalyst for all sorts of growth.
There were some internet derivative trades that worked exceptionally well; Google GOOG, IBM Corp. IBM,Rackspace Holding RAX and more.
But today’s bear of the day isn’t am unrecognized company that is on the cutting edge of technology or on the precipice of meteoric growth; it’s a seasoned ‘old tech’ company that is hanging on to another mature tech giant to generate the majority of its income.
The ties that bind
Cirrus (CRUS – Snapshot Report) generates a great deal of their total revenue from one client, Apple (almost 90% according to several sources). The company supplies Apple with audio chips for their mobile devices.
While it seems like a good deal to be in bed with one of the best and brightest companies out there, the relationship has its strains and Apple can not only have what it wants from Cirrus, but at just about any reasonable price.
With Apple’s brand strength waning and companies like Samsung and Blackberry BBRYnipping at their heels, Apple not only needs to fight for market share, but keep costs down as the average selling price for Smartphones has been on the decline.
Cirrus’s margins have been suffering as of late and their shares have tumbled from over $45 just 10 months ago to their current value just above $18. The company recently warned that lower product sales forecasts from an “unnamed” customer are going to hurt their future earnings.
Not a good sign…
Turnaround?
Cirrus is making some strides in broadening their customer base and product mix, but they have to watch their cash and their limited resources in addition to keeping their biggest client happy.
As a Zacks Rank #5 (strong sell), they haven’t been pleasing analysts or shareholders. While the P/E multiple seems attractive at 10.15 times forward earnings, one has to wonder just how bad earnings can get.
Analysts have been slashing their forecasts and the stock currently has a negative 23% ESP for the coming quarter’s earnings. This negative ESP, combined with the Zacks Rank of 5 makes for a high probability of a miss.
I think there is a future for Cirrus, but unless Apple’s new iPhone wows crowds and blows the ever increasing competition away, Apple and Cirrus along with it may have a long road to recovery.
If you are looking for a chip maker or want to play on the smartphone revolutoion, checkoutOmnivision Technologies Inc. (OVTI – Analyst Report) – Zack Rank #1 or evenQualcomm (QCOM – Analyst Report) with a Zacks Rank of 3.
Jared A Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He has written and published two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”. You can discover more of his insights and recommendations through his two portfolio recommendation services:
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