Shares of radio frequency (RF) chipmaker Qorvo (QRVO 0.10%) jumped 20% in the first half of 2017 despite a rocky start to the year, including an early May quarterly report that showed the company apparently losing RF market share to Skyworks Solutions. Qorvo shares have rallied remarkably due to the belief that it can strike it big in the next iPhone.
On the other hand, fellow Apple supplier Cirrus Logic (CRUS +0.01%) has underperformed the NASDAQ 100 Technology Sector index as its overdependence on the iPhone maker led to weak guidance earlier this year.
Both stocks have been gaining ground lately as the iPhone production cycle inches closer, but which one looks like a better bet from an investing standpoint? Let's find out.
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The case for Qorvo
Qorvo reportedly gets around a third of its revenue by supplying RF chips to iPhones. More importantly, the wireless-radio technologist expects greater revenue per iPhone this year. Qorvo's iPhone dollar content reportedly jumped 8% to $4 per unit during the last iPhone cycle. The company now believes that a combination of new RF filters will lead to more business from Apple.
Meanwhile, Qorvo is aggressively looking to expand its non-Apple business. It has already scored design wins at Xiaomi, Huawei, and Samsung. Investors, however, should take Qorvo's claims with a pinch of salt, as rival Skyworks Solutions seems to be gaining greater traction in China.
In fact, Skyworks now gets more than 10% of its revenue from Huawei as it is already supplying its LTE solutions to the latter's flagship smartphone. What's more, Skyworks' management believes that it can land $8 to $10 worth of dollar content in each Huawei smartphone going forward. This could hurt Qorvo's growth, as Huawei is its second-largest customer and contributes more than 10% of its revenue.
The case for Cirrus Logic
Cirrus Logic's fortunes are closely tied to Apple since it gets 78% of its revenue from Cupertino. The audio specialist's massive reliance on Apple has spooked investors lately after the iPhone maker decided to stop sourcing components from a couple of suppliers earlier this year.
But the concrete steps taken by Cirrus to diversify its business away from Apple are already working. It reduced its Apple-related revenue by 8 percentage points sequentially during the fiscal fourth quarter, thanks to gaining a chip spot inside Samsung's Galaxy S8. Additionally, the Galaxy S8's bundled headphones could also be powered by Cirrus' chips, which could substantially boost its sales given the immense popularity of the device.
Cirrus also expects an increase in the adoption of its audio solutions in midrange smartphones, which isn't surprising because OEMs have started packing high-end hardware in such devices. The company believes that midtier smartphones will start using its technology later this year, potentially boosting sales that are already growing at a good pace.
However, Cirrus investors should prepare themselves for a rough ride in the short run due to uncertainty regarding its spot in the upcoming iPhone. It looks likely that Cirrus' dollar content in the next iPhone might not increase since Cupertino could stick to older audio chips, so the chipmaker will be exclusively dependent on the number of iPhones produced for a boost. But that might work out as analysts expect new iPhone production to jump around 34% from the prior-year period. But at the same time, there is a risk that Cirrus might lose its audio chip spot in Apple's next flagship.
The verdict
The high dependence of these chipmakers on Apple for a substantial portion of their revenue is a double-edged sword. Cirrus is the more dependent of the two, so the downside is going to be greater if it doesn't find a slot in the next iPhone. But this is just speculation at this point, and the company's latest outlook indicates that demand for its audio codecs and amplifiers will increase.
But if investors are looking for a more diversified bet, Qorvo is the way to go since it is aggressively working on growing its non-Apple revenue. Additionally, it is poised to take advantage of the Internet of Things revolution through its RF chips, indicating that it has a greater end-market opportunity to tap compared to Cirrus Logic, which is primarily dependent on smartphones.
