(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of SWKS.)
The stock of Apple Inc. (AAPL) supplier Dialog Semiconductor, a UK-based company, has fallen by nearly 33 percent since November 30 on reports that Apple may dump the company and start developing its own chips. Such a move could create big problems for Dialog since it generates more than 50 percent of its revenue from Apple.
Since November 24, shares of Skyworks Solutions Inc. (SWKS), Qorvo Inc. (QRVO), and Cirrus Logic Inc. (CRUS) are all down between 11 and 13 percent in sympathy. But unlike Dialog, Skyworks and Qorvo have done a good job of growing their portfolios and becoming less reliant on Apple over the past couple of years, reducing some of that risk. However, Cirrus has not.
The heavy reliance on Apple is one reason why smaller chip companies like Skyworks, Cirrus, and Qorvo trade at relatively low multiples. They are all currently trading at less than 12 times one-year forward earnings estimates.
The news is a similar story to what had circulated back in April, when it was widely speculated that Apple might be looking to move away from Dialog. This would not be the first time Apple has done such a thing after it dumped UK-based Imagination Technologies. (See also: Semiconductor Names Tied at the Hip to Apple.)
Skyworks and Qorvo Diversify
According to Skyworks' 10-K, the company had three customers in fiscal 2017 that represented a large portion of its sales: Foxconn Technology Group, Samsung Electronics, and Huawei Technology.
According to the report, and the breakdown, Foxconn – which assembles Apple's iPhone units – represented 39 percent of Skyworks sales, down from 44 percent 2015. Meanwhile, neither Samsung nor Huawei were 10 percent customers in 2015. So while Skyworks carries a risk of losing Apple business, it has a much better-diversified portfolio than Dialog Semiconductor does, and is expanding away from Apple.
Like Skyworks, Qorvo saw its total revenue from Apple at 34 percent in fiscal year 2017, which was down from 37 percent from the previous year, while also selling to Huawei and Samsung, which represented 11 and 7 percent, respectively.
Dialog's Heavy Dependence
In its annual report for 2016, Dialog noted its top 5 customers were Apple, Samsung, Xiaomi, Panasonic, and Bosch. The report also indicates that Apple was the only company that represented 10 percent of sales in 2016, 2015, and 2014. That suggests that Dialog receives more than 50 percent of its total revenue from Apple.
Cirrus Is Very Dependent
While Skyworks and Qorvo rely heavily on Apple, only Cirrus Logic has more concentration more than Dialog. According to Cirrus Logic's latest 10-Q, Apple represented nearly 82 percent of the company's total sales in the fiscal second quarter of 2018, and that was up from 78 percent the year prior.
While there is some risk to Qorvo and Skyworks, these two companies have been doing a fairly good job of diversifying their businesses away from Apple over the past couple of years. Their businesses would take a sharp decline if they lost Apple, but given the current valuation of the shares, some of that risk may already be baked in.
It seems likely that Qorvo and Skyworks would not suffer the same fate as Dialog Semiconductor or Cirrus Logic, should Apple move away from them.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.