Cirrus Logic's (NASDAQ:CRUS) fortunes are largely dependent on Apple (NASDAQ:AAPL), as the manufacturer of audio codecs gets more than 80% of its revenue by selling its components to the smartphone giant.
So the recent reveal of Apple's latest iPhone 12 line-up is likely to give Cirrus Logic investors sleepless nights as it pointed out that the new devices won't come with EarPods in the box. Apple says its decision to exclude the EarPods and the power adapter from all four of its iPhone 12 models is based on environmental reasons.
New buyers entering the Apple smartphone ecosystem may find themselves short-changed, as the pricing of the new smartphones hasn't dropped because of the exclusion. But Cirrus Logic may eventually turn out to be the bigger loser because of this move.
Cirrus Logic's nightmare comes true
Rumors that Apple would drop the EarPods from the box of its new iPhone generation started circulating a few months ago. Now that the rumor has turned out to be true, Cirrus Logic's headline could take a material hit, as the chipmaker was reportedly making $1 for each unit of the EarPods sold for the components it supplied.
When Apple bundled the EarPods in the box, Cirrus had a guaranteed stream of revenue that's not there anymore. Consumers can still buy the EarPods separately, but they may opt to spend that amount on some other product. As such, the lack of EarPods could materially affect Cirrus' financial performance in the forthcoming quarters.
This was probably the reason the company's guidance for the recently concluded September quarter called for a mid-single-digit drop in revenue and failed to match Wall Street's expectations. Meanwhile, other Apple suppliers with a high degree of dependency on the smartphone giant didn't have such problems.
So don't be surprised to see Cirrus Logic issue tepid guidance when it releases fiscal 2021 second-quarter results on Monday, Nov. 2. However, there are a couple of catalysts that could play in Cirrus' favor and help mitigate the impact of the potential loss of revenue that the EarPods' exclusion could cause.
Apple's iPhone upgrade cycle could be a tailwind
Apple has brought 5G to all its iPhone models this time. The price begins at $699 for the smallest iPhone Mini with a 5.4-inch screen, followed by $799 for the standard iPhone 12. The iPhone 12 Pro carries a sticker price of $899, while the top-of-the-line Pro Max is priced at $1,099.
The pricing seems aggressive, considering that rival Samsung had launched its 5G-enabled Galaxy S20 at a starting price of $999 earlier this year. In fact, the cheapest iPhone 12 Mini is priced identically to the Samsung Galaxy S20 FE, a toned-down version of Samsung's current flagship. As such, Apple's iPhone installed base won't probably have to look elsewhere to get their hands on a 5G smartphone.
Moreover, the demand for smartphones with a smaller form factor may be coming back, as evident from sales of the new iPhone SE that's reportedly attracting users from the Android ecosystem. At the same time, Wedbush analyst Daniel Ives estimates that there are 350 million iPhones in an upgrade window.
This could help Apple move more iPhones and probably help Cirrus supply more chips. However, only time can tell us how consumers respond to the new devices and if the increased demand will be enough to compensate for the loss of revenue from the bundled EarPods.
In all, Cirrus Logic's prospects are surrounded by uncertainty going into its next quarterly report. The tech stock has been gaining some momentum of late, but Apple's latest move could wreck that momentum.