Just when the future looked bleak for Cirrus Logic, Apple has offered a lifeline for the domestic manufacturer to build out the next generation of AirPods.
In many ways, Cirrus Logic serves as a case study on how niche manufacturers fare in the modern economy. After initially building graphics chips for Microsoft in the 90s, the founders of Cirrus discovered a unique opportunity in the audio market by shifting their focus from integrated circuit hardware to active noise cancellation technology.
As you may have guessed, investing in active noise cancellation––which uses computer-generated sounds to interfere, and therefore neutralize, incoming noise––turned out to be a profitable decision. Competitors looking to stake their claim in the personal electronics industry recognized a need to include Cirrus’s proprietary technology to appease audiophile consumers.
Apple was one of those competitors. As they ramped up manufacturing of consumer devices incorporated with Siri or requiring hi-fi audio playback, they repeatedly turned to Cirrus, who had tailored their entire business model to meet the demands of the Silicon Valley giant. This partnership ensured Apple had “first dibs” access to the hardware components necessary for their products, and as a result, Cirrus experienced consistent growth for most of the 2000s and 2010s.
Savvy investors once used spikes in Cirrus stock to predict pre-release confirmation of new iPhone models, and as recently as last year, the Motley Fool heralded the partnership as favorable to both parties.
There was, however, a downside. As Apple came to represent 80% of Cirrus’ business, company profitability became dependent on the production of Apple devices. Unfortunately, 2018 has shown clear evidence of that dependency: as Apple down-adjusted its production expectations by 20%, shares of Cirrus plummeted in response, and have yet to recover.
With a renewed Cirrus contract officially signed off by Apple, things might still turn around.
What Apple stands to gain
The best reason Apple would want to continue its partnership with Cirrus is quality. Ever since Steve Jobs launched the iMac in the mid-90s, Apple has become iconic for the reliable quality of its consumer devices, and especially in the way it expresses that quality through aesthetics.
With their first attempt at AirPods––a rare misstep for the visionary company––Apple wound up rushing a product to market which was panned for its superfluous, shoddy design. If Apple aims to rebuild public support for the next generation of AirPods, they’re going to need the absolute best parts, built to the strictest specifications, on a tight timetable. Few, if any, companies could guarantee those elements more solidly than Cirrus.
Of course, Apple might also want to entrust Cirrus with their AirPod contract to maintain a positive working relationship. Evidence of this can already be seen in the size of the deal, which is expected to add about $50 million to Cirrus’ revenue. It’s a nice sum, but as Cirrus stands to generate $1.3 billion in revenue this year from all sales, the AirPods contract will only increase their top line by about 4%. For Apple, a company which has generated record billion dollars revenue this year, it will count for even less.
This contract comes at a time when analysts and investors are questioning Cirrus’ exposure to Apple, so a show of support by the tech giant will surely help to assuage some of those concerns. It will also help keep Apple a perennial priority for Cirrus, which, in the long run, is really what the Cupertino powerhouse stands to gain. As Apple seeks to build a greater diversity of high-quality consumer electronics, they are going to need high volumes and quick turnarounds of niche audio components, components whose construction Cirrus has already been researching.
What it means for Cirrus investors
The biggest takeaway for investors (current and prospective) is that the new AirPods contract solidifies the foundation Cirrus has based its business operations on over the last three years.
The American smartphone market has recently reached a saturation point of 95%, effectively slowing down production for domestic companies, while international manufacturers like Huawei continue to perform steadily despite fluctuations. For a relatively small, niche supplier like Cirrus, the way forward (for now) may be to capitalize on the mobile accessories market, which is estimated to grow by tens of billions over the next decade.
Apple seems to believe mobile accessories is a market worth investing into with their next wave of AirPods, and, if Cirrus can meet demand, the ongoing partnership could save the company from suffering additional loses.