Cirrus Logic (NASDAQ:CRUS) has paid the price of relying on Apple (NASDAQ:AAPL) for the majority of its revenue. The audio-chip specialist isn't going to win big from Cupertino's latest generation iPhones as Apple hasn't added new content from Cirrus in its latest devices, and its next biggest customer, Samsung, is switching to lower-priced components.

As a result, the company's top-line growth is expected to remain stunted this year even though it got 82% of its sales from Apple in the second quarter, up from 76% in the first one. In fact, Cirrus expects its revenue to remain flat year over year in the current quarter, which might seem surprising as Apple is busy ramping up iPhone production.

More specifically, the midpoint of Cirrus' revenue guidance is just 1% higher than last year's December-ended quarter, while Apple's outlook for the identical period indicates strong iPhone sales growth. Meanwhile, Cirrus' strategy of diversifying its revenue isn't bearing fruit, and this could be a big problem for the company.

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Cirrus' diversification efforts have fallen flat

Cirrus' Apple-related revenue had dropped from 85% in the third quarter of fiscal 2017 to 78% in the fourth quarter, before going down even further in the first quarter of the current fiscal year, then back up in the second quarter. The chipmaker had managed to increase its non-Apple revenue by making inroads into Android smartphones, and management said on the latest earnings call that it has continued making progress on this front.

But it is quite evident that Cirrus hasn't gained critical mass in Android smartphones just yet. This isn't surprising as the chipmaker has run into stiff competition from the likes of Qualcomm (NASDAQ:QCOM), which has cornered a substantial share of audio codecs in Samsung's latest flagship.

For instance, Cirrus was the sole supplier of audio codecs for the Galaxy S6, but Qualcomm captured 60% of this spot in the Galaxy S7. The trend has continued in Samsung's latest flagship, with Qualcomm capturing the audio codec spot for Asian Galaxy S8 smartphones. On top of that, the news of Samsung switching to a lower-priced component is another blow to Cirrus' diversification plans.

Looking ahead, Cirrus expects its business at Samsung to grow over the next couple of years, but this will be easier said than done thanks to the evolving technology and Qualcomm's increasing focus on audio chips.

The challenges ahead

Cirrus is betting big on voice biometrics, though its road map might not work out due to the introduction of technologies such as facial authentication. For instance, the chipmaker plans on making an embedded voice biometrics chip for smartphones that will store authentication data on the device itself, not on the cloud, where there are chances of a breach.

Currently, the technology is used in the banking industry, with Citi deploying voice biometrics in its Asia Pacific division, where over a million customers have used the same to reduce their verification times by 66%. However, the success of this technology in the smartphone space isn't a given in light of the growing traction of facial identification in smartphones.

Apple has made a big deal out of the Face ID feature in the latest iPhone X, and it is likely that Android OEMs (original equipment manufacturers) will jump on to the bandwagon soon.

Not surprisingly, Qualcomm has already made a move into this market along with Himax to make a facial authentication solution for smartphones that will start shipping in the first quarter of 2018. This could hurt the potential adoption of voice biometrics in smartphones, as leading smartphone makers are expected to introduce facial recognition in their flagships from the first half of next year.

Qualcomm poses another challenge to Cirrus considering its recent moves in wireless audio. Earlier this year, the company had launched five new audio platforms at different price points for use in wireless headsets and speakers, setting itself up to tap into the smart-home market. Additionally, the company is targeting the growing adoption of USB-C technology in smartphones, deploying a couple of chip platforms that will power wired headsets based on the USB-C standard.

Therefore, Cirrus will go face-to-face with Qualcomm as both companies are targeting the headset market and audio amplifiers. The bad news for Cirrus is that Qualcomm might have an upper hand in this space given its existing relationships with leading smartphone makers.

The headwinds facing Cirrus as it tries to diversify away from Apple make it a stock to avoid.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.