Reliance on a single customer for a huge chunk of revenue is weighing on this company, but that could turn into an advantage in the future.
Chipmaker Cirrus Logic (CRUS 0.15%) has been in fine form on the stock market for the majority of 2024, as its shares rose impressively through August this year, but a closer look at recent stock price action suggests that its rally has come to a shuddering halt in the past couple of months.
More specifically, Cirrus stock is down nearly 30% since hitting a 52-week high on Aug. 29, and the company’s latest quarterly results haven’t been enough to help turn its fortunes around. Shares of the company that’s known for supplying chips for Apple‘s (AAPL -0.12%) consumer devices such as iPhones and iPads fell 7% in extended trading following the release of its fiscal 2025 second-quarter results (which ended on Sept. 28) on Nov. 4.
Let’s see why that was the case and check if the stock’s dip is an opportunity for investors to buy more shares.
Cirrus Logic’s numbers were better than expected — but there was one problem
Cirrus reported fiscal Q2 revenue of $542 million, up 13% from the same period last year. It is also worth noting that the company’s revenue increased an impressive 45% on a sequential basis. The reading was well ahead of the midpoint of Cirrus’ Q2 revenue guidance of $520 million.
The strong increase in its revenue was driven by “higher unit volumes associated with new smartphone launches.” In simpler words, Cirrus benefited from the launch of new iPhones by its largest customer, Apple, which accounted for a whopping 90% of its top line last quarter.
That’s not surprising, as Apple is reportedly tapping Cirrus for both audio and power management chips in the latest iPhone generation, as suggested by a teardown of the devices. It is worth noting that Apple’s revenue from sales of iPhones was nearly flat in the quarter that ended in September at $201.1 billion. IDC estimates that Apple’s iPhone shipments increased by 3.5% in the third quarter of 2024 to 56 million units, making it the world’s second-largest smartphone company, with a share of 17.7%.
However, the fact that Cirrus reported a much stronger year-over-year increase in the top line indicates that it is getting more revenue from each unit of the iPhone that it sells. That can be attributed to Cirrus’ diversification beyond audio chips into other niches, such as power management modules, camera controllers, and haptics.
The company also reported a year-over-year increase of 25% in earnings to $2.25 per share, driven by an improvement of 90 basis points in its non-GAAP (generally accepted accounting principles) gross margin to 52.2%.
So, you may be wondering why the stock fell despite reporting healthy increases in both revenue and earnings. The problem with Cirrus’ latest quarterly report was its guidance.
The company expects fiscal Q3 revenue to land between $480 million and $540 million, the midpoint of which comes out to $510 million. That would translate into a year-over-year decline of almost 18%, as the company generated $619 million in revenue in the same period last year. However, Cirrus management points out that its guidance “reflects one less week of revenue, as FY24 was a 53-week fiscal year.”
At the same time, this may not be the only reason why the company’s revenue is set for a double-digit decline.
Is poor iPhone demand weighing on the chipmaker?
We have already seen that Cirrus’ revenue in the previous quarter increased by double digits, even though Apple’s iPhone sales during the same quarter increased in the low single digits. However, Cirrus’ dependency on just one customer for such a huge chunk of its revenue may weigh on its performance, at least in the short run.
A Reuters report points out that the shipping times for Apple’s iPhone 16 Pro models are much shorter than last year. More specifically, the average shipping time for the iPhone 16 Pro this year stands at 14 days, down from 24 days for last year’s model. The iPhone 16 Pro Max is witnessing a 19-day shipping time as compared to the iPhone 15 Pro Max’s 32 days.
Apple analyst Ming-Chi Kuo of TF International Securities points out that pre-orders of the iPhone 16 Pro and Pro Max models were down 27% and 16%, respectively, this year. These factors may have led Apple to pull back its production plans for the current quarter, which is usually a strong one, considering that it coincides with the holiday season.
This is probably another reason why Cirrus’ top line is set to contract significantly from the year-ago period, when it reported a 5% increase in revenue for the December quarter. However, savvy investors would do well to look at the bigger picture.
One reason why sales of the latest iPhone models are off to a slow start is because of the gradual rollout of the company’s Apple Intelligence suite of artificial intelligence (AI) features. Several of Apple’s AI features will only be made available to customers next year, which could be the reason why customers are not rushing out of the gate to upgrade their iPhones.
However, the presence of a huge number of iPhones in an upgrade window should ideally help Apple ship more iPhones going forward, especially because of the generative AI features that the company is set to offer. After all, shipments of generative AI smartphones are expected to increase at an annual rate of 78% through 2028, per IDC, hitting 912 million units at the end of the forecast period.
Given that Apple is the world’s second-largest smartphone company and the generative AI smartphone market is currently in its early phases of growth, it should be able to get its act together and witness an improvement in iPhone sales in the future. That should rub off positively on Cirrus Logic as well, considering its close ties to Cupertino.
That’s why investors would do well to keep this semiconductor stock on their watch lists. Cirrus is trading at an attractive 20 times earnings right now. It seems capable of regaining its mojo thanks to the huge opportunity present in the generative AI smartphone market and its relationship with Apple — two factors that could send its stock on a bull run once again.
