Why Apple Inc. Suppliers Could Be in Trouble

Learn which companies are more exposed to a possible decline in Apple's iPhone sales.

Feb 3, 2014 at 10:30AM

Apple's latest results were a mixed bag. On one hand, the company reported record earnings of $14.50 per share on sales of $57.6 billion, beating both the Street's consensus and the official forecast. On the other hand, iPhone unit sales were less than expected, which combined with a lower guidance for the current quarter. That triggered a strong sell-off, as investors worry that global demand for the iPhone may be peaking.

However, the biggest losers of a possible reduction in iPhone demand may be Apple's suppliers. There are several companies that sell a significant amount of their technological products to Apple, and depend heavily on Apple's overall performance. Simply put, the greater the portion of inventory sold to Apple, the more exposed they are to the Cupertino-based company. 

Cirrus Logic (NASDAQ:CRUS), which in 2013 got 82% of its revenue from Apple, could be the most affected. Qualcomm (NASDAQ:QCOM) and Skyworks Solutions, may also see a decrease in sales volume. How can these companies avoid a sudden decrease in market value if iPhone sales continue to weaken?

AAPL Chart

Source: YCharts.

The Apple effect
As the smartphone arena becomes more commoditized, and new ambitious players like Lenovo adopt aggressive pricing strategies to win market share in territories previously dominated by Apple, the global demand for iPhones is likely to become more unstable. To avoid massive revenue fluctuations, Apple's suppliers must diversify their revenue streams as much as possible.

Notice that, in its current state, Cirrus Logic is also is quite vulnerable to Apple's decisions in regards to the iPhone's pricing and choice of technology. Apple has enormous bargaining power, as Cirrus Logic sells most of its amplifiers, integrated circuits, and mixed-signal processing technologies to Apple. Rumors that Apple's new iPad Air may not include audio amplifiers manufactured by Cirrus Logic caused a massive sell-off last week, with shares going down more than 10% after the announcement.

Fortunately, Cirrus Logic is attempting to diversify its revenue sources by entering new markets. For example, the company recently started to develop LED light bulbs, which can be sold to different companies. 

Qualcomm should do well
As the world's biggest smartphone chip company, Qualcomm is an important supplier to Apple, as it provides the company with cellular modem technology for the iPhone. Notice that Qualcomm also sells its products to Apple's competitors, and therefore is well-prepared for a sudden decrease in iPhone orders. 

Qualcomm recently announced its revenue rose 10% in the first fiscal quarter, easing investors' concerns that the chip maker may see a negative surprise due to Apple's lower-than-expected iPhone sales. The company reaffirmed a forecast of 5% to 11% revenue growth for the current fiscal year.

Final Foolish Takeaway
Despite announcing strong financial performance in the latest quarter, Apple shares experienced a massive sell-off as sales for the company's flagship product came in lower than expected. However, the big losers here may be Apple's suppliers. Cirrus Logic, which makes most of its revenue from Apple orders, may be the most affected company. Since Apple's announcement, Cirrus Logic has lost more than 10% of its market value. 

It is important that suppliers reduce their exposure to Apple, by entering new markets, approaching Apple's competitors, and manufacturing technology that is easy to be adapted to different smartphone models. The good news is that Apple is still selling a huge amount of iPhones. Therefore, even if demand for Apple's flagship product eventually peaks, suppliers should have enough time to search for alternative revenue sources.

Apple's next creation will be revolutionary!
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, Cirrus Logic, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers