Avoid Cypress Semiconductor

NEW YORK ( TheStreet) -- At the onset of 2013, the Street expected a strong rebound in chip stocks. Although the industry did rebound from a weak 2012 to post 20% gains last year, it was nonetheless a disappointment, given that the sector (in aggregate) still trailed the 25% gains of the S&P 500.

So there's still a chance that things will only get better. But I'm still trying to reconcile the reason for the faith in Cypress Semiconductor ( CY), which has posted a three-year stock decline of 20% despite having a strong patent portfolio. The company has a well-diversified operation that, in some instances, surpasses both Qualcomm ( QCOM) and Broadcom ( BRCM). Management has failed to capitalize on these strengths.

With consistent outperformers like Qualcomm and ARM Holdings (ARMH) still leading the way, I understand why the Street has remained optimistic. I will even grant that investors' love for Intel (INTC) is justified, given the company's mobile advances.

But Cypress has struggled to grow since picking off rival chip company Ramtron International almost one year ago for $110 million. There was a lot of speculation as to what Cypress was thinking when the deal was announced. Given Ramtron's capabilities in non-volatile memory chips and mobile, I believed the acquisition made sense. But these predictions were only partly correct.

Today, with the stock still under pressure and a business that has seemingly gone nowhere in three years, I believe it's time for a drastic change, especially since the company's management has been unable to execute on all the "potential." With the company due to report fourth-quarter earnings on Thursday, management will have to wear magician hats to make the Street see what really isn't there -- that Cypress can be a long-term outperformer.

The Street will be looking for 8 cents in earnings per share on revenue of $166.3 million, which would represent year-over-year revenue decline of almost 8%. As low as these numbers may appear, I don't see how the company will be able to meet these targets, given Cypress' weakness in mobile computing and in Asian markets. Plus, there are still significant operational deficits management is working to overcome related to the Ramtron deal.

The other thing to remember here is this entire sector continues to struggle with weak margins due to lower average selling prices (ASP) of high-end handsets. This is the main reason why Broadcom underperformed for all of 2013. Even so, unlike Broadcom and Qualcomm, which are also battling high-end device saturation, Cypress does not enjoy the leverage of having Apple (AAPL) as a product partner.

This is another reason why I've been unable to give this management team the benefit of the doubt -- not when adjusted gross margin continues to trend lower each quarter while revenue guidance missed estimates by 20%. What this means is management isn't making the right decisions. After so many years of failed plans, I can't say I have any faith it can right this ship.

Now I do realize this may be perceived as harsh. Even so, purely from a performance standpoint, I offer no apologies. Investors are suffering. Today the company's critics are looking smarter with each passing quarter. To that end, I'm buying into any notion that this stock is cheap, even with the 24% decline over the past six months.

The company's exposure to the dying personal computer industry should not be discounted. Let's not forget two of Cypress' largest customers -- Nokia (NOK) and BlackBerry (BBRY) -- are not exactly juggernauts in the mobile/wireless handset market. I question whether Cypress' management anticipated BlackBerry's demise or that Nokia would have sold its handset business to Microsoft (MSFT).

Regardless of the scenario, stay away from this stock. I do understand the appeal of "buying the bottom" but I don't believe Cypress is there yet. Unless you have a crystal ball and know this current management team is still up to the task, you would be better off buying a lottery ticket.

At the time of publication, the author was long AAPL.

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