Just when it looked like all doors had closed for Cirrus Logic (NASDAQ:CRUS), Apple (NASDAQ:AAPL) seems to have thrown it a lifeline. The audio-chip specialist has reportedly scored the contract to supply noise-canceling chips for the iPhone maker's upcoming AirPods.
Susquehanna analyst Christopher Rolland is of the opinion that this new business could add $50 million to Cirrus' revenue, but fellow Motley Fool contributor Ashraf Eassa says this wouldn't move the needle for the chipmaker in a big way, as it is expected to generate around $1.3 billion in revenue during the ongoing fiscal year.
However, at a time when rumors of Apple cutting iPhone production by as much as 20% have been weighing on Cirrus' stock, this potential new contract is a glimmer of hope. Such a design win would vindicate the company's new direction of targeting the smartphone accessory market for growth.
Cirrus' strategy gains validation
Cirrus Logic is trying to overcome a patchy smartphone market by tapping the accessories space. Headphones equipped with active noise control (ANC) present one such opportunity, as this technology is expected to be widely deployed in smart headsets. Tractica estimates that sales of smart headphones -- which will pack in features such as heart tracking, language translation, and environment-driven noise cancellation -- will increase from 5.6 million units last year to 13.7 million units annually in 2022.
However, this is just the smart headset market that we're talking about. The overall opportunity is bigger because ANC technology is being deployed on a broader scale in traditional headphones as well. For instance, demand for earbuds could increase at a compound annual growth rate of 30% for the next five years thanks to the addition of wireless and ANC technology, as they can deliver a more immersive listening experience.
Not surprisingly, Apple and others are seeing strong demand for their products after the adoption of ANC. Analyst Ming-Chi Kuo believes that the company is on track to sell 28 million AirPods this year, double what it did in 2017. That would be great news for Cirrus Logic provided it manages to hold on to this spot, but it also means that its reliance on Cupertino for a lion's share of its revenue will continue.
Of course, adoption of this tech by the smartphone industry in general, which is usually quick to mimic Apple, could open up a bigger opportunity for Cirrus.
The way ahead
Cirrus claims that it sells ANC chips to another major smartphone OEM in addition to Apple, so it seems to have already established a solid position for itself in the premium end of the market.
The chipmaker is now looking to expand into the mid-tier and budget end of the segment, as demand for entry-level headphones is on the rise globally. To attack these segments, Cirrus is currently working on smart ANC chips that can be deployed in wired headphones thanks to USB technology.
Wired headphones generally cost less than their wireless counterparts, so they could generate strong volumes for Cirrus. More importantly, Cirrus expects to gain traction in mid-tier and budget Android smartphones sooner rather than later, as it claims to be involved in "multiple customer engagements for both wired and wireless digital headsets."
Don't get excited just yet
But one shouldn't miss the reality of the Apple-induced slowdown that Cirrus is currently facing. The chipmaker has failed to score new design wins in Apple's smartphones, which sell in much larger numbers than AirPods. The lack of new content in iPhones has hurt Cirrus Logic's top-line growth in recent quarters, since it gets close to 80% of its revenue from this account.
Also, winning over the accessories market is easier said than done thanks to the scattered nature of this space, where there are multiple OEMs making headphones and other accessories. So, even though Cirrus seems to be pulling the right strings to execute a turnaround, investors shouldn't expect quick gains just yet. It faces bigger challenges that can only be addressed if there are enough customers deploying its chips in large numbers in accessories such as headsets.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Cirrus Logic. The Motley Fool has a disclosure policy.