Being an Apple (AAPL 0.52%) supplier can be a blessing and a curse. On one hand, robust sales of Apple's products can significantly boost revenue and profits every year. But on the other hand, these suppliers can become too dependent on Apple -- and the iPhone maker's cyclical downturns can be difficult for them to endure.
Apple's development of its own chips also suggests the tech giant could gradually replace most of its third-party components with first-party ones. Furthermore, it could abruptly swap suppliers or split an existing supplier's orders with its competitors to secure lower prices. As a result, most of Apple's suppliers don't have much clout in negotiating favorable terms.
Image source: Apple.
For 2023, IDC expects iPhone shipments to decline 0.5% as the market continues to "suffer from weak demand and ongoing macroeconomic challenges." The soft post-pandemic PC market should also curb Apple's near-term sales of Macs, which IDC estimates already plummeted 40.5% year over year in the first quarter of 2023.
That's why analysts expect Apple's revenue and earnings to decline 2% and 3%, respectively, this year. That gloomy near-term outlook could spell trouble for three companies that depend too much on Apple: Cirrus Logic (CRUS 1.18%), Skyworks Solutions (SWKS 1.81%), and Lumentum (LITE -0.12%).
What do these three companies produce?
Cirrus Logic mainly sells audio converters and chips, but it also develops other mixed-signal processing chips for wireless headsets, wearables, augmented reality/virtual reality (AR/VR) headsets, notebook computers, and mobile devices. Apple installs Cirrus' audio chips and IC controllers in its iPhones, iPads, and Macs.
Skyworks produces a wide range of wireless chips for the mobile, automotive, home automation, wireless infrastructure, and industrial markets. Apple installs Skyworks' wireless chips in its iPhones, iPads, Macs, Apple Watches, and other devices.
Lumentum is a diversified supplier of optical chips for service providers, 3D-sensing chips which are used in mobile devices, cars, 3D printers, and other industrial machines, as well as commercial lasers for manufacturing various products. Apple uses Lumentum's 3D-sensing chips and lasers to power its Face ID features.
How much do these three companies depend on Apple?
At first glance, all three of these Apple suppliers seem to be generating slow but stable growth.
|
Company |
Estimated Revenue Growth (Current Fiscal Year) |
Estimated Revenue Growth (Next Fiscal Year) |
|---|---|---|
|
Cirrus Logic |
6% |
1% |
|
Skyworks Solutions |
(9%) |
9% |
|
Lumentum |
4% |
2% |
Data source: Yahoo Finance, April 27, 2023.
Yet they would also struggle to exist without Apple's continued support. Cirrus relied on Apple for 79% of its revenue in fiscal 2022 (which ended last March). Skyworks generated 58% of its revenue from Apple in fiscal 2022 (which ended last September), while Lumentum generated 29% of its revenue from Apple in fiscal 2022 (which ended last June).
Apple isn't loyal to any of these suppliers. Back in 2019, many analysts expected Apple to install Cirrus' chips in its AirPods. But to the chagrin of Cirrus' investors, Apple eventually chose chips from Maxim (now part of Analog Devices) instead of sticking with its longtime audio chip supplier. This April, Cirrus' stock plunged on reports that Apple could abandon the solid-state buttons (which Cirrus was developing IC controllers for) in its top-tier iPhone 15 models.
As for Skyworks Solutions, several reports in late 2021 claimed Apple was developing its own wireless chips to pivot away from third-party chipmakers. Apple hasn't launched any of those rumored chips yet, but they nevertheless represent an unpredictable headwind for Skyworks and other wireless chipmakers. Meanwhile, Lumentum's stock stumbled in early April amid troubling reports that Apple could split some of its laser orders with Sony.
Just invest in Apple instead of these three suppliers
Investors can certainly make a lot of money by investing in a small components maker before it secures any meaningful business from Apple or other big tech companies. But once it signs those contracts and relies on Apple for the lion's share of its revenue, it arguably becomes a less appealing investment because it becomes subservient to its massive partner.
That's why I've repeatedly argued that it makes more sense to simply invest in Apple than in one of its leading suppliers. Cirrus, Skyworks, and Lumentum all might seem cheap right now at 14, 11, and 9 times forward earnings, respectively, but they're trading at such a steep discount to Apple's forward multiple of 28 because they're much riskier stocks.
