Analyst Says Sell Cirrus On Weaker Growth, Distant Catalysts

The shares of Cirrus Logic (CRUS) are falling after Bank of America Merrill Lynch started coverage of the stock with an Underperform, the firm's equivalent of a sell rating. The company's growth will decelerate tremendously next year, warned the firm, which set a $50 price target on the name. Cirrus supplies audio and voice chips for mobile devices.

DECELERATION: Cirrus obtains 75%-80% of its revenue from Apple's (AAPL) iPhone, but Cirrus' revenue per iPhone may not increase after its fiscal 2018, according to Bank of America analyst Adam Gonzalez. As a result, the analyst believes that the compound annual growth rate of the company's sales and profits will decline to 4%-5% between fiscal 2017 and fiscal 2020, from 30% between fiscal 2015 and fiscal 2017.

LIMITED NEAR-TERM CATALYSTS: Cirrus is looking to enter new markets and it can "meaningfully expand" by obtaining more revenue from Android smartphones, wearables, voice biometrics and a number of other sources, the analyst stated. However, the company probably won't generate significant revenue from these new sources for at least two to three years. In the meantime, the R&D costs needed to support them will limit Cirrus' profit growth, warned Gonzalez.

RISK/REWARD: Cirrus' risk/reward ratio is negative, as the stock will gain 17% versus Friday's close to $68 in a bullish scenario for the company, but the shares will plunge 46% in a bearish scenario, Gonzalez wrote.

PRICE ACTION: In morning trading, Cirrus fell 2.5% to $56.42 per share.

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