The Bad Side of Doing Business With Apple
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s hard to consider that there it be a better derivative play today on Wall Street than that of tech giant Apple (NASDAQ: AAPL). Its famed “halo effect” has not only become legendary, but to the extent that if the company sees fit to breathe on you, analysts will rush to upgrade your stock. But it’s a double-edged sword. Just as quickly as Apple can elevate your status, it can easily take it away. The challenge for most companies is to prove that for as great of a benefit it is to have Apple’s business, Apple is not the air that said company breathes. This seems to be what Audience (NASDAQ: ADNC) is experiencing today.
On the rumor that Apple would no longer utilize the company’s voice and noise suppression technology, Audience lost almost 70% of its value in one day – from a close of $18.86 in one day to just a third of that ($6.90) the next. Now the company has to defend itself not only from lawsuits, but also from claims of impropriety from investors who believe that have been mislead by the company’s disclosures over the past four months. But that’s how it happens.
A company cannot lose 60% to 70% of its value in a manner of days and expect to get away with it. Investors always insist it’s the fault of the company. However, sufficient due diligence would have revealed some red flags and would have possibly prevented these losses. A closer look at the company’s earnings would have revealed that Apple’s licensing of Audience’s processor chips accounted for 37% of Audience’s total revenue for both the three and six months ended June 30.
What this means is that, as noted in my opening, the problem for Audience was that Apple was indeed the air that it breathes – a signal for investors to approach with caution. The question now is, should this be considered a fatal blow to Audience? At this point it is hard to say. However, moving forward I wonder how Audience will be able to convince the importance of its technology to potential clients – particularly if a company such as Apple doesn’t think it is important enough to maintain in its new iPhone? Even more important is where and how will Audience replace almost 40% of its revenue that it has lost?
There are many questions left to answer. But one thing is for certain, in light of the several pending lawsuits, I would imagine that things will likely get worse before it gets better. The good thing for the company is that it still has relationships with Apple rivals in Google (NASDAQ: GOOG) and Samsung. But they are not Apple. In fact, current investors should now start investigating what percentage of revenue does Google and Samsung provide to Audience. What happens if they too elect to go elsewhere?
It’s not all bad
Though Audience is not faring particularly well due to its overdependency on Apple, there are names such as Qualcomm (NASDAQ: QCOM) that continue to demonstrate that aside from its relationship with Apple, it has one of the best businesses on the market with an exceptional management team – one that it determined to sustain the company’s string of market beating performances.
Another name to consider is that of ARM Holdings (NASDAQ: ARMH). More than any other company, it has figured out how to do it successfully. Not only does it have significant exposure to Apple, but it gets the best of both worlds by also being a key component in Microsoft’s (NASDAQ: MSFT) Windows phone as well as licensing out its chip technology to Google and Amazon.com (NASDAQ: AMZN). The important factor here is that both Qualcomm and ARM have incredible businesses with or without Apple.
Investors might also consider a name such as Cirrus Logic (NASDAQ: CRUS) and to a lesser extent a small chip company such as TriQuint (NASDAQ: TQNT) might present a good derivative opportunity but as with Audience, Apple accounts for over 30% of TriQuint’s revenue. So there is reason to be cautious here as well.
As concerning as this situation might be for Audience, it’s not that way for every company that has Apple’s business. The fact of the matter is, the same way you and I can change our minds as to the stores in which we shop, or the contractors that service our homes and businesses, Apple has every right to change its mind about who it chooses to do business with.
It is unfair to expect that it is the job of Apple or anyone else to keep another business solvent. Nonetheless, it is the duty of every investor to ensure that one single company (in this case Apple) cannot significantly tip the scale of success and failure of your investments.
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rsaintvilus is currently long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Qualcomm. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.