When specialty chip maker Audience Inc went public in May this year, investors jumped at the opportunity to invest in a supplier to Apple Inc and ride the coattails of its success in the consumer electronics market.

But when Audience announced last week that its technology was unlikely to be used in the new iPhone, the stock plunged more than 60 percent and is now an example of the perils of investing in small companies that rely on one or two big clients for the bulk of their business.

"Companies that have massive concentration with one customer and without really strong checks and balance on that customer relationship, it's a risk," said Jeremy Levine, a partner with Bessemer Venture Partners and not an investor in Audience.

Mountain View, California-based Audience makes chips that improve the voice quality in mobile devices by filtering out background noise. It went public in May at $17 per share, or a valuation of roughly $330 million.

The stock, which rose to as high as $23.41 in mid-June, closed at $6.75 on Wednesday, making it the worst U.S. IPO this year, with $200 million of market value wiped out in the past four trading days since the iPhone news.

Niche technology companies like Audience are often pitched by Wall Street banks as a way for investors to gain exposure to high-flying tech companies at relatively lower valuations.

Some of these companies emerge from the shadow of their clients and become successful in their own right, such as Qualcomm Inc, which once relied on a handful of South Korean customers and is now a leading wireless chipmaker.

But others suffered as key relationships deteriorated. In 2006, semiconductor company Portal Player was hit after Apple dumped the firm as its media processor chip vendor for the iPod. Portal Player, which had gone public just two years prior and relied on Apple for 90 percent of its revenue, was later acquired by Nvidia Corp.

Audience "shows how dangerous some of these IPOs can be," said Timothy Loughran, a finance professor at the University of Notre Dame. "Just one quick announcement can blow up the stock. Some of these companies are less developed and haven't yet gotten a large client base."

Audience itself has warned about such risks in its IPO prospectus for investors, citing its reliance on one original equipment manufacturer (OEM) and its contract manufacturers (CMs). Audience said 75 percent of its 2011 revenue came from contract manufacturers for Apple.

"We are substantially dependent on a single OEM and its CMs, for our revenue and our relationship with this OEM is undergoing a significant transition from the sale of voice and audio processors to the license of our processor IP, which may have a material and negative effect on our business, financial condition, operating results and cash flows," Audience said in the prospectus.

BEYOND APPLE

Audience did not say why Apple decided to drop its chips but said on a conference call with analysts last Friday that Apple has built up its own audio team.

While some law firms have said they are investigating potential claims against Audience for failing to adequately disclose the Apple risk, Audience Chief Executive Peter Santos said he is confident that "we have conducted ourselves with integrity."

"At the time when we were wanting to go public and thinking about that, we had very good visibility into the diversification away from Apple and towards Samsung and other customers," Santos said in a telephone interview.

Samsung Electronics accounted for 36 percent of Audience's revenue for the three months to March 31, 2012, up from 5 percent in the year earlier period. In contrast, Apple's contribution had fallen to 62 percent of revenue from 95 percent during the same period, according to Audience's IPO prospectus.

Santos said he expects major Asian tech vendors, including Huawei Technology Co Ltd, ZTE Corp, HTC Corp and LG Electronics, to be among Audience's significant customers over the next 12 months.

Beyond mobile devices, the company sees demand for its voice and audio technology in automobile infotainment systems, digital televisions, notebook computers and ultrabooks, the CEO said.

Audience's stock tumble underscores the risks that face investors of companies dependent on a few large customers.

Another example is social gaming company Zynga Inc, which is heavily reliant on Facebook users playing its games. Zynga shares cratered when Facebook Inc's IPO flopped, and the stock is down about 70 percent for the year to date.

Shares of prepaid cards provider Green Dot Corp, which went public in July 2010, fell 63 percent this year after several of the company's retailers began selling competing products, including Wal-Mart Stores Inc. Green Dot derived roughly 60 percent of revenue from Wal-Mart.

"When people invest in IPOs of innovative companies, they need to understand it could be a really big hit but there's a chance of it falling back also," said Christopher Austin, a partner in Goodwin Procter LLP's technology practice. "It just takes one product change or one decision by your main customer who decides to develop its own technology."

Venture firm New Enterprise Associates may stand to lose the most from Audience, as it held roughly 21 percent of the company's shares outstanding as of June 30, according to a regulatory filing. The firm declined to comment.

Wellington Management, AllianceBernstein and JPMorgan Asset Management were Audience's largest institutional shareholders as of June 30, owning a combined 11.8 percent. It was not immediately clear if they still own the stock. Wellington Management and JPMorgan could not be reached for comment, AllianceBernstein declined to comment.