Cypress Semiconductor Is Still a Poor Bet

Richard Saintvilus

NEW YORK ( TheStreet) -- Each time I've written an article that's not explicitly favorable about a particular company, investors often go out of their way to make it known that the opinion is not appreciated. It never fails.

But I never could quite understand how those who invest in Cypress Semiconductor continue to ignore the frequency with which management of this company present people like me with negative material.

As much as I've covered semiconductor companies, it has always amazed me of how Cypress, which, in my opinion, has a well-diversified operation that (in some instances) exceed the likes of Qualcomm and Broadcom . But management has failed to produce on that potential. Yet, investors have consistently given the company a pass, believing the "next time is the charm." After Cypress' earnings warning last week, I don't believe management will ever realize the value that it has promised to deliver over the past three years.

Last week, citing weakness in both mobile computing and its Asian markets, Cypress not only cut its outlook for its third-quarter earnings due out in a couple of weeks, but the company also lowered its fourth-quarter forecast. Given that it hasn't been a stellar year for the entire chip sector, Cypress' earnings warnings comes as no surprise. But unlike, say, Broadcom and Qualcomm, which are also battling high-end device saturation and low average selling prices (ASP), Cypress, which does not have the benefit of being in Apple products, continues to be at a disadvantage.

Making matters worse, with management guiding adjusted gross margin to be lower by 50 basis points, there's no debating that the company is now dealing with significant pressure. And if that wasn't bad enough, management said it expects fourth-quarter revenue to be down by 9% to 11% sequentially, or $164 million to $170 million, which is 20% below Street estimates.

On the news, the stock lost almost 15%, closing Monday at $9.35. There are those who are now suggesting these shares present "a compelling entry point." But given the degree to which management has described the situation, I don't believe this stock has found a floor. While I do understand the appeal to be "greedy on fear," Cypress, which continues to have significant exposure in the dying personal computer business, has not shown that it deserves the benefit of the doubt.

Before buying this stock, one would have to question how is it possible that any management team who understands its business well enough can be off by such a meaningful margin as the recent guidance revision suggests? What this means is that the management team, by virtue of its initial guidance range issued in July, was too overzealous about device launches from two of its prominent customers in Nokia and BlackBerry .

However, since Cypress' July guidance, Nokia sold off its handset business to Microsoft and BlackBerry is now selling for peanuts. It's one thing to anticipate revenue to some in on the high-end of projections due to the excitement spurred by device launches, it's managerial failure -- in my opinion -- to have absolutely no idea what direction your partners are taking.

To that end, I don't see Cypress as a legitimate investment play unless investors believe that management can grow this company solely on its relationship with Samsung . The way I see it; expectations for the company were and are still too high, given Cypress' exposure to difficult and volatile end markets like China.

And even if you expect better guidance/earnings results for the first quarter of 2014, there are clear underlying fundamental issues with this company that suggest it's best to stay away from this stock. While it's true the stock may seem attractive, that the company is expected to post a loss for the second consecutive year, this is still a poor bet.

At the time of publication, the author held shares of Apple.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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