It is no longer news for Apple Inc. (AAPL) investors and enthusiasts that Intel Corporation (INTC) will be supplying a portion of the cellular modems for the next generation of iPhones, specifically the iPhone 7.
What could be new, however, is that Intel stock could be supplying 50% or more of those cellular modems for the next generation of iPhones, according to Timothy Arcuri of Cowen and Company. If this turns out to be the reality, Arcuri believes that the win could mean about $1.5 billion in incremental revenue for Intel stock over the next year.
According to the analyst’s calculations, this would mean $850 million in gross profit over the next year for INTC. That’d be over 56% gross margin.
This Gives Intel Stock a Major Win
Just in case there was any doubt, this Intel win would displace Qualcomm, Inc. (QCOM) as the number one iPhone modem supplier.
And after a notorious failure to extend its number one position in chip making to the mobile market, if true, this is a game-changer for Intel. And that’s not just because of the potential $1.5 billion in revenue, which is huge in itself.
Intel stock witnessed a loss of about $4.2 billion in its mobile segment in 2014, and it was only able to reduce that loss to $3.4 billion last year. However, the deal with Apple could spell the beginning of a road to long-term profitability in its mobile business.
First, Intel seems to offer greater value for money for Apple compared to Qualcomm. In the research note, Arcuri said Intel stock would receive $15 per modem from Apple. Qualcomm also receives $15 per modem from Apple, according Stacy Rasgon of Sanford C. Bernstein.
The value is in the superior features that Intel’s 7360 LTE modem offers. For instance, it offers faster hypothetical downlink speed up to 450 Mbps and uplink speed that’s up to 100 Mbps.
If INTC stock delivers on this promise of superior performance, the deal with Apple would only become bigger. In fact, as Arcuri said, this could help Intel stock win a deal to integrate its cellular modem tech into Apple’s processors, which would make iPhones operate more efficiently, while cutting manufacturing costs for Apple.
This shows just how tantalizing the opportunity here is for Intel … although, we’ll have to wait to see how well the initial deal works out.
INTC Could Expand Into Internet of Things Next
In the case everything works out well with Apple on this deal, Intel stock would have boosted its resumé of providing solutions to the mobile market, which is already tending towards internet of things and connected cars.
According to INTC CEO Brian Krzanich, the company is joining the bandwagon that aims to change the mobility landscape, a move that has become so huge that insurance companies are already admitting it could change their business. For instance, tech companies moving into the connected car business could surprisingly become big auto liability insurance buyers.
Intel recently entered into a joint venture agreement with BMW and Mobileye NV (MBLY), an Israeli automotive software company. Apple is also reported to be working on its own connected and autonomous car.
If Intel stock successfully establishes itself in the ecosystem of Apple suppliers, there would be more chance than ever that the two companies could work together on Apple cars.
For the record, Apple has the potential to generate up to $400 billion in annual revenue from this market.
Takeaway for INTC Stock
Neither the win in the modem sales for iPhone 7 nor the potential win the connected car market would make Intel’s mobile business profitable overnight. At best, it’s only a move in the right direction. Recently, INTC earned an upgrade at Bernstein.
However, with Intel’s enduring leading position in the PC market coupled with the stability its huge cash flow history offers, I would have Intel stock in my portfolio as a blue-chip stock for a very long time.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
