Today Bloomberg reported: Apple iPhone Suppliers Decline on Report Orders Cut by 50%. The Nikkei newswire said orders for iPhone5 parts had been cut about 50 percent following lower-than-expected sales.
Personally I have reservations as to the validity of such news. To begin with, it's not easy to get access to such information because suppliers would be breaching confidentiality agreements they have with Apple. Second, if we assume that iPhone sales are doing badly and forward looking sales are not even close to analyst estimates, it means that the entire analyst community is wrong about Apple's forward revenue projections. I don't know about you, but I'm not ready to doubt the entire community of Apple analysts.
A while ago I told you about my favorite Apple (AAPL) supplier Cirrus Logic (CRUS) (please consider :How To Make Money With Cirrus Logic). Brushing aside the question of lower Apple iPhone sales, assuming that Apple were to develop a cheaper iPhone for the emerging market space -- as I and others have hinted -- will CRUS be affected? The answer is yes, but in a positive way.
Lets say that Apple wants to design a new product and they need parts from Cirrus Logic. Apple engineers call Cirrus Logic and tell them what they want and give them specifications. Cirrus Logic will design what Apple wants from scratch. In other words, it's not something they already have in stock or used in competitive products. Apple does not want others to know its specifications so everything is custom made.
Because of this, there is a very close relationship between Apple and Cirrus Logic. Also, Cirrus Logic can't sell the products they make for Apple to others even if they wanted too. Both Apple and Cirrus Logic have a vested interest to be loyal to one another. As a result, about 70% of Cirrus Logic's revenue comes from Apple.
So let's say Apple announces that they will make several new phones targeted towards the emerging markets space. The question is, with what companies will Apple do business with, to design components that will go into these new cheaper phones? Well one of those companies will most definitely be Cirrus Logic. The reason is:
- Apple has an excellent relationship with Cirrus Logic
- Cirrus Logic has designed components that have satisfied Apple's high standards
- And above all, Cirrus Logic and Apple trust each other
So even if we assume forward iPhones sales will be lower than analyst estimates, if Apple decides to enter Samsung's turf and make phones for China and other emerging markets, then Cirrus Logic will have more business as a result.
Reason being that a cheaper iPhone will sell many more times the absolute number of iPhone5 units Apple can currently sell. More phones means more devices for Cirrus Logic.
And because I have a wild imagination, I can see longer term Cirrus Logic getting business from Apple to the tune of several hundred million devices on a yearly basis.
In light of Cirrus Logic's excellent fundamentals, its recently announced $200 million share repurchase program and the possibility that its business with Apple might increase in the future, I reiterate my $56 a share 12 month target for the stock. Also, if Apple announces it will be entering the emerging markets space with a new cheaper phone, my target price will probably be revised upward.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.