If you follow Apple (AAPL +0.11%) and its suppliers, you've surely heard of Cirrus Logic (CRUS +0.00%), a maker of key audio chips inside the former's iPhone, iPad, and Mac product lines.
But even if you've heard of Cirrus Logic, you might not know how it makes its money and what markets it's going after. Let's take a closer look.
Image source: Apple.
Cirrus is highly dependent on Apple
Although the company has been trying to diversify its product offerings and customer base, Cirrus Logic is critically dependent on Apple.
During Cirrus Logic's most recent quarter, the third quarter of fiscal 2019, 83% of its sales were to Apple. That figure was 81% over the last nine months and 82% for the first nine months of fiscal 2018, but it's down from 86% in Q3 2018. Still, you shouldn't invest in Cirrus Logic stock without knowing just how much the company depends on Apple.
After all, if Apple launched a dud, Cirrus could suffer even if its own product execution was stellar. And there's always the looming specter of vertical integration. If Apple decided to build its own audio chips and cut Cirrus Logic out, then unless it cut a deal like the one Apple made with Dialog Semiconductor, Cirrus' shares could plummet.
Beyond Apple
Despite the current sales numbers, Cirrus Logic has been working to diversify its portable-audio business beyond Apple. Although the company doesn't have any other customers that make up 10% or more of its revenue, CEO Jason Rhode said on the most recent earnings call that Cirrus Logic is "absolutely on track to having a second 10% customer again." He added that "we expect really good things, new design wins, to ramp to real material volume within this current quarter."
Breaking that last comment down, Rhode said the company's involvement in the Android space comes mainly in the form of audio amplifier chips but that as the year progresses, an increasing portion of the company's Android business will come from sales of haptic drivers, which, as one of Cirrus Logic's competitors explains, are chips that provide "tactile feedback" to users.
Check out all our earnings call transcripts.
Beyond portable audio
Cirrus Logic's business today mainly consists of selling audio chips to Apple, but over time the company's ambition is to not only diversify beyond Apple, as we're seeing with the company's efforts to supply audio chips into Android-based smartphones, but to also do more than sell audio products.
For example, in its most recent investor presentation, the company pegged the opportunity for haptic drivers at $450 million by 2021, up from $170 million in 2017. Those are simply total addressable market (TAM) figures, but if Cirrus Logic can grow its share within that growing TAM, that could give the business a real boost.
In that same presentation, Cirrus Logic indicated that the opportunity for audio chips in smart audio accessories -- think products such as Apple's AirPods -- will be $900 million by 2021, and that the market for chips that handle voice biometrics will swell to $750 million, up from, well, nothing in 2017. The company also points to the smart home and consumer audio markets as ones that could represent a $400 million TAM.
It's not surprising that Cirrus is looking to expand beyond selling audio chips to Apple. Not only do these new markets open up additional opportunities for revenue and profit growth, but over time as Cirrus Logic gains traction in these product categories, it should see its customer base diversify immensely, reducing the overall risk profile of the business and, in the end, the stock.
