Apple Won't Buy Cirrus Logic

| About: Cirrus Logic, (CRUS)

Cirrus Logic (NASDAQ:CRUS) has been a disaster for its investors, with shares losing well over half of their September 2012 peak value:

CRUS Chart
(Click to enlarge)

CRUS data by YCharts

I now see that investors, such as my esteemed colleague Josh Arnold, are hoping that Apple (NASDAQ:AAPL), the customer that provides a big chunk of Cirrus' revenues/profits, will outright buy Cirrus, or perhaps take an equity stake. I don't think that this will be the case, and any bets on such a buyout are likely to lead to disappointment. Here's why I don't think such a take-out is likely.

There Is No Need To

I can understand why Apple wanted to have its own apps processor team in house. With control over its operating system and software ecosystem, Apple could best optimize its user experience by determining what kind of processing power is needed, and how best to allocate the transistors to what kinds of tasks. Apple takes pride in its graphics-focused SoCs relative to the merchant silicon available today, and its focus on a few, elegantly designed CPU cores, rather than a brute force "more cores" race helps to make it arguably the best-designed chip for a small, light, and power efficient phone.

But what does Cirrus Logic make for Apple? Audio chips. These are as commodity as it gets, despite the fact that Cirrus makes quite good audio chips. Apple could switch suppliers at any time, and it's not as though the $3.25 or so of content that goes into each phone is hurting Apple so badly that it needs to vertically integrate and keep the margin on these chips for itself. In fact, it gets worse for Cirrus.

Apple Will Squeeze Margins

Look at Cirrus' gross margin trend:

CRUS Gross Profit Margin Quarterly Chart
(Click to enlarge)

CRUS Gross Profit Margin Quarterly data by YCharts

See the squeeze that Apple is likely putting on Cirrus? The problem here is that so much of Cirrus' revenues depend on Apple's business (well over 60%) that Apple can squeeze as much as it darn pleases. What's Cirrus going to do, stop supplying? That would kill the business!

I know there's a story about how Cirrus is going to diversify its customers, but until it can show material growth, and until Apple is maybe a 10-20% customer at most (unlikely anytime soon), there is still absolutely huge risk there for further, very serious, margin compression.

So, why should Apple buy Cirrus when it can simply get the best deal on the planet on the components? Why should Apple take on the difficulties and complexities of integrating and managing another tangential business when it can just buy the chips and save the headache?


Apple won't buy Cirrus, but it will continue to squeeze its margins as much as it can in order to get the best deal possible for itself. I don't really see any other acquirer, either, because simply put Cirrus is just not all that important in the scheme of things. It can be substituted, and therefore given its dependence on Apple it can, and most likely will, be squeezed.

Besides, on top of all of this, when has Apple been known to make $1B+ acquisitions?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.