Cirrus Logic: A chip stock you're going to hear a lot more about

Key Points

• Cirrus Logic's shares lagged behind those of its bigger peers last year, but that's set to change. 
• This week's earnings have caught investors by surprise in the best possible way. 
• Already, the stock is tracking towards last year's all-time high and looks good value to keep on going. 

With so much of the talk around semiconductor stocks dominated by the likes of NVIDIA Corp NASDAQ: NVDA, Advanced Micro Dynamics NASDAQ: AMD, and the like, it's easy to think there aren't that many smaller-cap chip stocks floating about. However, even with a market cap of less than $5 billion, compared to NVIDIA's $1.7 trillion, Cirrus Logic, Inc. NASDAQ: CRUS can still pack a punch. 

It rode the artificial intelligence (AI) inspired boom in chip stocks a year ago but then underperformed many of its bigger peers through the fall. An end-of-year rally to the tune of 30% showed the potential it had, and this is a theme that's been built on with yesterday's 15% jump. 

The latest catalyst for the move higher was the company's fiscal Q3 earnings, which were released on Tuesday evening. Cirrus managed to beat analyst expectations for both headline numbers, with revenue coming in at a record high alongside its best-ever EPS print of $2.57. 

Bullish outlook

Beyond the beat on the big numbers, the company's forward guidance also came in hot, which itself can be a major driver of upward momentum in share price. It effectively says that the market has been undervaluing a stock based on future expectations that have now been raised by the business itself. It's one of the most bullish signals a company can give, and it's no surprise that investors have been impressed by it. 

They've also been impressed by what they're seeing as a higher level of execution from senior leadership. Starting off 2024 with the highest revenue and EPS print is exactly what investors would have been looking for, and it bodes well for Cirrus' prospects in the months ahead. Significant milestones were ticked off with regard to the production of next-generation audio components, while the company also made notable progress in its process technology and foundry strategy. 

 

It also saw strong customer engagement with its laptop solutions and advanced several R&D programs in the high-performance mixed-signal business. CEO John Forsyth pointed to all these and emphasized the company's robust product roadmap, which he sees pushing shares on to further gains through 2024 and beyond. 

Previous concerns around the company's dependence on Apple Inc NASDAQ: AAPL, who as a customer has been responsible for upwards of 80% of Cirrus' revenue, are continuing to dissipate, with Forsyth opening up more Android-focused revenue channels and diversifying the company's overall turnover. 

High expectations

So, just how far can Cirrus rally from here? Well, the past few days have seen several major upgrades from analysts, who've been boosting their price targets accordingly. Susquehanna and TD Cowen, for example, both came out bullish on the stock, each giving it a fresh price target of $100. Even including yesterday's pop, that's still pointing to a further upside of more than 10%. Were Cirrus shares able to hit that in the coming weeks, they'd be within touching distance of last April's all-time high, and you'd have to be thinking they'd be good value to keep on going. 

The risk-on sentiment sweeping equities right now is just too good to be ignored, due in large part to the growing consensus that the Fed has managed a soft landing. Inflation readings are continuing to cool, and expectations for an end to rate hikes, and maybe even a cut, are growing. While the relative strength index (RSI) for Cirrus' shares is reading 70, suggesting the stock is overbought, it's nowhere near high enough to be a cause for concern right now.

With the semiconductor industry as a whole bouncing back from a tough couple of years and with Cirrus hitting record revenue and earnings numbers, there's a lot of upward momentum left to play out before investors should be getting wary.