Here’s Why the Apple Inc. (AAPL) Deal Didn’t Move Intel Corporation (INTC) Stock

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Intel Corporation (INTC) has seen some spectacular failures in the past, including letting an upstart like Advanced Micro Devices, Inc. (AMD) eat its lunch in the 64-bit server business for years before finally clawing back some respectability. But few are probably as memorable as its mobile flop.

Here's Why the Apple Inc. (AAPL) Deal Didn't Move Intel Corporation (INTC) Stock

Intel’s failure to gain a proper foothold in the smartphone market sticks out like a sore thumb in the company’s impressive litany of achievements, and is part of the reason why INTC stock has badly lagged the sector as well as the broader market over the last couple of years.

Over the past five years, INTC stock has tacked on gains of 50% versus 65% by iShares PHLX Semiconductor ETF (SOXX) and 60% by the S&P 500 Index.

This unfortunate trend has spilled over into the current year, with INTC stock losing 8% to the 12% and 0.5% gains by SOXX and the S&P 500, respectively.

It’s therefore somewhat surprising that INTC stock has nudged forward less than two percentage points even after reports that the company remains on course to score its first major smartphone win: a deal with iPhone giant Apple Inc. (AAPL). Bloomberg confirmed on June 10 that Apple will indeed use 4G baseband modems in the upcoming iPhone 7.

Contrary to earlier Wall Street reports which stated that Intel’s smartphone chips will only go into lower-end iPhones targeted at emerging economies, Bloomberg reported that Apple will use Intel’s baseband modems in iPhones meant for AT&T Inc.’s (T) network, as well as for certain overseas markets.

Meanwhile, mobile player Qualcomm, Inc. (QCOM) chips will go into iPhones meant for Verizon Communications Inc. (VZ) network as well as in iPhones sold in China.

Big Payday for Intel

The Apple deal is by no means insignificant for Intel. INTC had all but entirely given up trying to become competitive in mobile application processors. A string of ignominious miscalculations left INTC reeling after booking losses of about $1 billion every quarter due to the infamous contra-revenue arrangements with smartphone manufacturers. It therefore hardly came as a surprise when Intel announced that it was shuttering its Atom smartphone business in May.

Luckily for Intel, the company acquired VIA Telecom’s modem business last year, and therefore still retains some mobile presence of sorts.

But just how big is Intel’s modem deal with Apple? Quite big, if the estimates coming from Wall Street are any indication. BTIG Research estimates that AT&T will sell 22 million to 23 million iPhones in the current year. Throw in another 30 million iPhones with INTC modems sold overseas and Intel could sell well in excess of 50 million iPhone 7 modems during the first year of the deal.

IHS estimates that Qualcomm gets $13 for each iPhone 6s chip. Assuming Intel gets $15 per pop, then the company could be looking at $750M in incremental revenue this year alone. That’s enough to qualify as Intel’s biggest mobile haul since it entered the market.

At this point, the question that begs for an answer is: why has the investing community remained largely indifferent to these good tidings? Is it too late for Intel to make a mark in the mobile world?

Flipping the Mobile Script

There are several plausible reasons why the market has shrugged off the Apple deal.

The first and biggest reason is that Intel has already flipped the mobile script after indicating that it’s no longer interested in competing with the likes of Qualcomm and Samsung Electronic (SSNLF) in baseband modems. Earlier in the year Intel said that it will trim its mobile R&D by about $1 billion, and instead direct those resources to more promising segments such as IoT and Data Centres.

So the Apple deal might simply be a classic case of serendipity for Intel, and there is no guarantee the company will keep hitting the jackpot. In any case, Intel’s XMM 7360 that will go into iPhone 7 cannot hold a candle to Qualcomm’s Snapdragon X16, performance-wise.

Then there is the nagging question of Apple’s sourcing leverage. Apple is likely to lift a page from its old playbook where it keeps several suppliers in the wings and can quickly ditch an errant supplier whenever something goes wrong.

Apple did that with Qualcomm last year after it discovered the Snapdragon 820, manufactured by GlobalFoundries, was seriously overheating. Poor QCOM has never fully recovered since.

On a brighter note, Apple does tend to stick with reliable suppliers for long stretches, and Intel is one of the best in the business. Unlike Qualcomm, Intel owns its own fabs which helps it to control the final product more effectively. It’s therefore not very likely that Intel will stumble the way Qualcomm did.

But ultimately, as big as Apple is, it’s not big enough for Intel to stake its entire mobile fortune. Intel needs to demonstrate that it can nab several other large mobile customers, and you don’t do that by severely cutting your R&D budget. The fact that Apple’s iPhone business has hit a plateau does not help Intel’s case either.

It might not be too late for Intel to cut itself a respectable niche and make a mark in the smartphone business. But unless the company is able to nab more mobile customers, expect INTC stock to remain unmoved by the Apple deal.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/intel-corporation-intc-stock-apple-inc-aapl/.

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