1 Beaten-Down Chip Stock Proved Its Mettle

I put Cypress Semiconductor (NAS: CY) on notice earlier this week. The chip maker was stuck with second-class design wins (or worse) in 2011, and the flow of orders dried up in the second quarter. If Cypress couldn't show me that things would turn around later on in 2012, then my bullish CAPScall on this stock would be as good as gone.

We've known the basics of the first quarter for a while because Cypress brutally revised its revenue and earnings guidance with a red Sharpie last month. The final sales tally of $185 million fell smack in the middle of the revised forecast -- but non-GAAP earnings of $0.12 per share beat the slashed outlook's top end by a penny.

More importantly, the gloomy 0.58 book-to-bill ratio from the fourth quarter bounced back to a very healthy 1.33. This metric is a barometer of future sales, where anything above 1.0 typically points to a lot of fresh orders yet to be filled. It's safe to say that Cypress really will do better in the second half of the year, armed with an overflowing order book.

Cypress CFO Brad Buss found a new lease on life here. "We [...] expect Q2 revenue to increase significantly, and earnings to grow at a faster rate than sales, due to our continued restraint of operating expenses," he said. "Our outlook is positive. We have the strongest product portfolio in our history, with numerous new revenue drivers across multiple product lines."

Management explained that a recently introduced touchscreen controller line created a "one-quarter hole" in the revenue streams. Smartphone and tablet builders need some time to test new chips before committing to using them in upcoming gadgets.

The new touch controllers play on both the high-cost and low-cost ends of the spectrum. Traditional rivals Atmel (NAS: ATML) and Synaptics (NAS: SYNA) need to watch their backs as a newly invigorated Cypress should be able to snag its fair share of design wins for the rest of the year.

That being said, the market is interpreting Cypress' strong results as a good sign for smartphone component makers in general. Cypress rules the roost with a well-deserved 13% overnight price jump, of course, but Atmel also stomped the overall market today with a 3% gain, and Synaptics enjoyed a smaller but still impressive 2% boost. These companies won't report results for another week or two, and their gains fly in the face of a disappointing update from important mobility specialistQualcomm (NAS: QCOM) .

I'd tread lightly around Cypress' rivals for now, but the company itself is back in my good graces. Cypress remains a thumbs-up CAPScall in my book. The company just proved that it deserves a fair slice of the trillion-dollar mobile computing pie.

At the time thisarticle was published Fool contributorAnders Bylundholds no position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool owns shares of QUALCOMM.Motley Fool newsletter serviceshave recommended buying shares of Cypress Semiconductor. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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