Cirrus Logic's (CRUS -2.84%) stock price dropped 12% on April 12 on concerns that it could lose some key orders from its top customer Apple (AAPL 0.06%).

In a blog post, TF International Securities analyst Ming-Chi Kuo claimed Apple would likely "abandon the closely watched solid-state button design and revert to the traditional physical button design" in the upcoming iPhone 15 Pro and Pro Max due to "unresolved technical issues." As the exclusive producer of IC controllers for those haptic buttons, Cirrus would take a bigger hit from that rumored change than Apple's other suppliers.

Loop Capital issued a similar warning, claiming that Cirrus had expected a gain of as much as $1.60 per device from those two top-tier iPhones. KeyBanc Capital Markets analyst John Vihn had previously estimated that on average, Cirrus could sell up to $7 in components to Apple for each iPhone 15, compared to an estimated $5.70 in components for each iPhone 14. If those two estimates are accurate, Cirrus could lose more than a fifth of its iPhone 15 component sales if Apple scraps its solid-state button.

Person listening to music on a smartphone.

Image source: Getty Images.

Did investors overreact to those rumors and actually create a good buying opportunity in Cirrus, which remains up nearly 20% over the past 12 months? Or does it merely highlight Cirrus' overwhelming dependence on Apple and its limited long-term growth potential?

A company that couldn't survive without Apple

Cirrus is a market leader in audio converters and chips, but it's been developing other mixed-signal processing chips for wireless headsets, wearables, augmented reality/virtual reality (AR/VR) headsets, laptops, and mobile devices in recent years.

Cirrus serves thousands of customers, but the lion's share of its revenue comes from Apple, which installs its audio chips and IC controllers in its iPhones, iPads, and Macs. It relied on Apple for 79% of its revenue in fiscal 2022 (which ended last March), 83% of its revenue in fiscal 2021, and 79% of its revenue in fiscal 2020.

That puts Cirrus in the same category as other Apple suppliers like Skyworks Solutions and Lumentum, which relied on Apple for 58% and 29% of their revenues, respectively, in their latest fiscal years.

Cirrus' overwhelming dependence on Apple is a double-edged sword. Its revenue rises and falls in tandem with Apple's hardware sales, but there's a constant fear that Apple will eventually split its orders with another supplier or develop in-house alternatives. Cirrus probably doesn't have much pricing power when it comes to negotiating with Apple, and it's at the mercy of its abrupt specification changes or order reductions.

Apple won't replace Cirrus' chips anytime soon, but it previously used audio chips from Analog Devices' Maxim in its AirPods instead of Cirrus' chips. Therefore, investors shouldn't be too surprised if Apple eventually courts other suppliers to reduce its dependence on Cirrus' chips. 

How fast has Cirrus been growing?

Cirrus' revenue declined in fiscal 2018 and fiscal 2019 as the global smartphone market cooled off, but it's risen consistently over the past three years as the market stabilized. Apple's launch of the iPhone 12 (its first family of 5G devices) in 2020 aided that growth. Cirrus' gross margins also expanded as it sold a larger quantity of pricier chips.

Metric

FY 2018

FY 2019

FY 2020

FY 2021

FY 2022

Revenue growth

(0.4%)

(22.6%)

11.1%

6.9%

30.1%

Adjusted gross margin

49.7%

50.5%

52.7%

51.7%

52.1%

Data source: Cirrus Logic.

In the first nine months of fiscal 2023, Cirrus' revenue rose 18% year over year, but supply chain headwinds and an unfavorable mix of lower-margin components reduced its adjusted gross margin from 51.8% to 50.6%. It expects its revenue to rise 5% to 8% for the full year, compared to analysts' expectations for 6% growth. Analysts expect its revenue to only rise 2% in fiscal 2024 as it laps the iPhone 15 upgrade cycle. Its adjusted earnings per share (EPS) are expected to decline 8% this year before rising 3% in fiscal 2024.

Cirrus' growth is decelerating, but its stock looks cheap at 14 times forward earnings. However, it's still pricier than Skyworks and Lumentum, which trade at 9 and 11 times forward earnings, respectively. Moreover, Cirrus' forward valuations are still pegged to estimates that assume it can grow its content share in the iPhone 15 significantly.

It's not the right time to buy Cirrus

Cirrus Logic will likely keep growing, but I'd rather simply invest in Apple than take my chances on this cyclical supplier. Cirrus simply has too much exposure to Apple compared to Skyworks, Lumentum, and other leading iPhone suppliers, and the replacement of the solid-state button in the upcoming iPhone 15 could severely throttle its near-term growth.