According to a new report from analyst Christopher Rolland with Susquehanna (via MarketWatch), Cirrus Logic (CRUS -2.35%), a well-known supplier of audio chips for Apple's (AAPL -0.57%) product lines, will be supplying chips that perform noise-cancellation functions in Apple's next-generation AirPods wireless earbuds.
This win, Rolland says, could boost Cirrus' revenue by $50 million. For some perspective, Cirrus Logic is expected to generate roughly $1.36 billion in revenue during its current fiscal year (down 11% year over year), so this reported win inside of Apple's next-generation AirPods isn't really going to move the needle for the company from a revenue perspective.
Image source: Apple.
In terms of profits, this reported win is an entirely different story. Rolland thinks these orders will add a whopping $0.50 per share to Cirrus Logic's bottom line. Cirrus Logic is expected to earn $2.96 per share in the current fiscal year. An incremental $0.50 in earnings per share would represent a respectable 16.9% increase in earnings per share (assuming that current analyst estimates don't factor in the AirPods win that Rolland reported).
Although the potential windfall from this win could be nice for Cirrus Logic -- particularly if Apple AirPods shipments continue to grow and Cirrus Logic continues to supply the noise-cancellation chips in future models -- there's a bigger, potentially more exciting, picture investors should consider.
Apple leads, others follow
It's no secret that Cirrus Logic is heavily dependent on sales of audio chips to Apple. According to Cirrus Logic's most recent 10-K filing, its business with Apple made up an eye-popping 81% of its fiscal year 2018 revenue, an increase from 79% the year before.
Although Cirrus Logic reportedly winning some additional Apple business clearly means more revenue and profit, the fact that the business is with a customer that Cirrus Logic is already so dependent on won't do much to assuage investor fears around the very real customer concentration risk the company faces.
In fact, if anything, if a significant part of Cirrus Logic's overall revenue and profit growth continues to come from sales to Apple, investors may view Cirrus Logic's current financial results as perpetually at moderate-to-high risk.
With that being said, I don't want to give the impression of being overly negative. Apple is generally viewed as a trendsetter in the mobile device industry, and since Apple's AirPods have turned out to be a smash hit, generating billions in revenue for the company, it's only natural that other smartphone makers and specialized smartphone accessory makers will want to copy the AirPods.
In fact, Chinese smartphone maker Huawei recently announced its own AirPods knock-offs (known as the Huawei FreeBuds) and smartphone maker OnePlus is also reportedly working on its own AirPods clones.
Should future versions of these AirPods copycats eventually incorporate the same noise-cancellation technology that Apple's next AirPods will reportedly have, then Cirrus Logic could be well positioned to supply chips to those smartphone makers and, potentially, many other companies. That additional shipment volume could help drive further revenue and profit growth -- something that would surely make Cirrus Logic stockholders happy.
Investor takeaway
I don't think Cirrus Logic reportedly winning the noise-cancellation spot inside of a future pair of AirPods is something that should fundamentally change your investment thesis around the company -- if you liked Cirrus Logic stock before, you'll still like it now, and if you didn't like the stock before, this likely isn't going to change your mind.
Ultimately, Cirrus Logic seems well positioned to benefit from what seems to be an increased focus industry-wide on audio technologies as key selling points for future accessories related to mobile devices, and I think the company's reported win inside of Apple's next-generation AirPods serves as a nice proof point of that.
