Apple's [AAPL] share price has surged on reports that the company is looking to snap up Intel’s [INTC] smartphone chip business, a further signal that the iPhone maker is looking to reduce its dependency on third-party component suppliers by bringing key technologies in-house..
The Wall Street Journal reported on Monday that Apple was in “advanced talks” to buy Intel’s cellular modem patents and staff for $1bn. Later, an article from Bloomberg, which cited its own anonymous sources, also corroborated the rumours. By the end of the day on Monday, Apple’s share price had risen 2.6% since Friday’s close, hitting $207.22, and continued to rise throughout Tuesday.
If successful, the purchase could allow Apple to accelerate development of a 5G-enabled iPhone, and release the next-gen handset years earlier than if Apple developed its own modems from scratch. Rumours of an Intel-Apple deal have been floating since at least June, when The Information put out a first report.
Taking matters in-house
Suppliers – especially chipmakers – have been a source of headache for Apple over the past year. A legal spat with Qualcomm [QCOM], which Apple accused of exercising predatory pricing over patent royalties, only ended in April, after Apple agreed to pay out at least $4.5bn in compensation and granted Qualcomm multi-year patent licencing and supply agreements.
Earlier this month, Apple was revealed to have paid $770m in compensation to Samsung , which used to supply it with displays and memory chips, after slow iPhone X sales forced Apple to cut orders at the Korean firm. The Californian company is also speculated to have part-financed the bailout of another of its key display vendors, Japan Display , which late in June secured a $485m lifeline led by Chinese asset managers.
Value of Japan Display bailout, allegedly part-financed by Apple
The race for a 5G iPhone
The Qualcomm payout is only a minor financial setback for Apple, which reported $5.9bn in profits and a cash balance of $38bn in the latest quarter alone. Arguably, the strongest rationale to switch from external vendors to in-house manufacturing for key electronics lies in the race to release a 5G-capable iPhone.
Last week, Raymond James analyst Chris Caso wrote that the eventual introduction of 5G connectivity to Apple’s main money-maker will provide a boost to sales, after a 2019 cycle that he says will be “the weakest in many years” as iPhone users delay upgrades to new models.
However, a report from The Information in May suggested Apple’s push to produce its own 5G modems may not bear fruit until 2025. Should a 5G iPhone be released in 2020, as TF International Securities analyst Ming Chi Kuo suggested in a note last month, it would need to be powered by Qualcomm chips. Acquiring assets from Intel may solve the problem that Apple has in pushing that roadmap forward.
|PE ratio (TTM)||17.55|
|Quarterly Earnings Growth (YoY)||-16.40%|
Apple share price vitals, Yahoo finance, 25 July 2019
Windfall for Intel
While other analysts are more sceptical about any boost that 5G could provide to iPhone sales, the rumoured deal would prove a boon to Intel in the immediate term.
The chipmaker, which is posting results today after Wall Street closes, spooked investors in April as it cut full-year guidance, prompting a 24% fall in stock value over the following month, to $44.59. But news on 25 June that the company would auction off its smartphone 5G patents – “There is no clear path to profitability”, CEO Bob Swan had said in April – was well-received by shareholders, sending share price up as much as 2.8% throughout the next day to $48.19. Monday’s reports pushed the stock up 2.7% over the day, and Intel closed at $51.35, up 11.7% for the year-to-date.
Exiting 5G may not solve Intel’s revenue troubles, which primarily stem from weak demand from data centre customers. But Monday’s share price boost, which implies a forward PE of 11.8, puts its stock on a slightly better footing against AMD [AMD] and Qualcomm, which trade at 32.24 and 14.51 times forward earnings, respectively. Apple shareholders, meanwhile, have something to look forward to as the company prepare to report next Tuesday.
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