Cirrus Logic (Nasdaq: CRUS) has been riding the smartphone boom to record results. Well, more to the point, it's following the wild success of its far-and-away largest customer Apple (Nasdaq: AAPL) to those results. Cirrus Logic might strike some investors as a one-trick pony, but its place in Apple's products might be stronger than the company is given credit for. Also, Cirrus Logic has exposure to other key growth markets that could give its shares, even after a nearly 150% run-up over the past year, more fuel to keep rising.

Today we'll take a look at not only the key opportunities investors should be watching at Cirrus Logic, but also the key threats that could send the company's stock collapsing.

What to watch for: The good

  • In its latest quarter, Cirrus Logic derived about 54% of its revenue from Apple. Understandably, this extreme customer concentration is enough to scare away some investors. While Apple's greatest challenge might be keeping its massive supply chain meeting customer demand, the company's not afraid to swap out vendors or source certain components from multiple parties. In the latest Verizon iPhone release, Infineon was booted out in favor of a Qualcomm (Nasdaq: QCOM) baseband chip. There are reports Qualcomm will end up supplying all baseband chips when the iPhone 5 comes out. However, Cirrus' design for audio components in Apple products is highly customized; this isn't like storage chips that Apple can use multiple vendors or easily swap out one company's design for another. While investors should be rightfully suspicious of Cirrus' reliance on Apple, its spot within their product line-up and the level of customization across different Apple products is an underappreciated advantage.  
  • Cirrus has a number of innovative energy products that are just starting to ramp into production. Its power factor control (PFC) chips attempt to apply a more efficient digital approach to a large market that's been dominated by analog power. Also on the energy front is the company's push into the rapidly growing LED market. Both PFCs and LED controller chips are on the lower end of content (revenue) per unit but are in massive markets that Cirrus could carve its own niche in. Watching Cirrus' energy progress is especially important for investors looking for the company to diversify away from a reliance on Apple.
  • Infotainment in car audio systems provides another catalyst for Cirrus Logic. The company has partnered with Ford (NYSE: F) to provide audio codecs in Ford's popular Sync communications and entertainment system. With Sync only costing a reported $30 (for components such as the processor, audio, and memory) and proving to be an extremely popular add-on that boosts Ford's margins, other car companies are rushing to emulate their success. Cirrus sits in an enviable position in this space: its customized audio codecs cost less than a few dollars, but can offer meaningful audio improvements. Once the company has audio codec wins, it can add further design features such as audio amplifiers, which deliver substantially higher revenue per unit. While smartphone makers other than Apple may balk at the incremental cost of improving their audio components, it's an easy sell to car companies where audio is often a key customer buying decision. Other than Ford, Cirrus Logic has other wins such as in Sirius XM (Nasdaq: SIRI) docks. Sirius XM's entire business centers around offering a rich audio experience, so it's not surprising the company has found value in Cirrus' solutions.

What to watch for: the bad

  • The downside of Cirrus' focus on solidifying its place in Apple's products is that it has no smartphone exposure to speak of aside from Apple. Partially, that comes from the company's extreme focus on keeping Apple as a customer and providing devoted engineering resources for the company, but it does reenforce that losing slots in any Apple products leaves the company's audio unit in a difficult position.
  • While the company's entry into markets like PFC and LED lighting are exciting opportunities, they're both new markets that Cirrus Logic will be challenged in breaking into. Especially on the energy side, the company faces significant competition and requires large volume orders for meaningful revenue contributions.
  • Even if Cirrus' customized products are well engrained across Apple's product line, the threat of execution risk remains. For example, longtime Apple supplier TriQuint (Nasdaq: TQNT) was recently booted out of the newest Verizon iPhone because of supply constraints. While Cirrus Logic follows a fabless manufacturing model, execution risk can take on many forms such as a poor design that causes Apple to reconsider its reliance on Cirrus. Another alternative scenario that could play out is Apple removing Cirrus from a product line like its MacBook Airs while retaining the company's audio products in other lines. That wouldn't be a deal breaker for Cirrus, but could limit its potential to ride Apple's coat tails across strength in all its product lines.

Final thoughts
Cirrus Logic is experiencing torrid growth rates, but still faces significant threats and a need to broaden its product lines and customer concentration before investors will begin giving it higher multiples that other high-growth peers receive. 

The best way to stay ahead of these challenges is to be aware of the pressures facing the company, and keep up with the news surrounding Cirrus. The Motley Fool recently introduced a free My Watchlist feature that allows users to stay ahead of the curve and receive up-to-date news on companies like Cirrus Logic or any of its competitors. To get up-to-date news analysis, add Cirrus Logic to your watchlist today.

Eric Bleeker owns shares of Cirrus Logic. Apple and Ford are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a bull call spread position on Apple. The Fool has written puts on Apple and owns shares of Apple, Cirrus Logic, Ford, Qualcomm, and TriQuint Semiconductor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.