PacCrest Goes Against Apple, Cirrus Bears: iPhone 7 Noise-Cancelling Earbuds Huge Opportunity

• Having declined steadily since December 8, Cirrus Logic, Inc. CRUS shares have lost 25 percent.
• Pacific Crest’s John Vinh upgraded the rating for the company to Overweight, with a price target of $40.
• Vinh cited the pullback in shares, reset in expectations and CES takeaways as the reasons for the change in rating.

Cirrus preannounced its F3Q16 revenue at $347 million, below the midpoint of its guidance at $385 million and missing the PacCrest estimate of $389 million and consensus of $386 million.

The Apple Inc. AAPL supplier’s revenue was hit by weakness in iPhone demand, which became increasingly soft toward the end of the year. Cirrus expects demand to continue to be weak into F4Q16. Management reiterated its expectation of robust growth in F2017.

Analyst John Vinh said that meetings with headphone OEMs at CES boosted confidence in the noise-canceling earbud opportunity in the iPhone 7. This is because:
There were several headphones on display with Lighting connector interfaces.
OEMs indicated superior sound quality from the use of a digital connector and the ability to embed a smart codec in the headphone.

“In our view, Apple needs a compelling feature upgrade, which noise-canceling earbuds would provide,” Vinh commented. He added that the reset in expectations and recent pullback in the company’s shares offered “a buying opportunity.”

The EPS estimate for F2016 has been reduced from $2.73 to $2.43. The EPS estimate for F2017 has been raised from $3.08 to $3.34 to reflect an incremental $2 in content opportunity for Cirrus.