Earlier this week, VentureBeat reported that Apple Inc. (NASDAQ:AAPL) has chosen to install LTE modem chips from Intel Corporation (NASDAQ:INTC) in the new iPhone beginning next year. From the initial launch of the first iPhone in 2007 through 2010, AAPL sourced its smartphone modem chips from Infineon.
However, when INTC acquired Infineon in 2010, Apple management severed the relationship and turned to Qualcomm, Inc. (NASDAQ:QCOM).
The apparently uneasy relationship between AAPL and QCOM led to the new arrangement with INTC. At one time drastically behind in the mobile chipset race, Intel has poured countless millions into research and development in an attempt to remain a respectable presence in the mobile device arena.
The shift in focus from desktop and laptop processors to mobile device chipsets has been an evolution at Intel, and while slow to get the ball rolling, INTC finally looks to be on the right track.
INTC Might Supply LTE Chips for New iPhone
Arrangements with Apple to provide the LTE modem for the next iteration of the iPhone will almost certainly boost Intel stock. If the new iPhone becomes as popular as the iPhone 6, which will undoubtedly be the case, INTC investors should be handsomely rewarded. Also considering the millions of prospective buyers in Apple’s newest market, China, retailers won’t be able to keep shelves stocked with a new iPhone containing Intel silicon.
Intel’s benefit from such a relationship depends on its ability to meet Apple’s demands, deadlines and volume requirements. However, last December, management announced plans to invest an additional $1.6 billion over the next 15 years to advance its mobile chip development and manufacturing capabilities.
Also, Intel’s benefit will only last as long as it takes for Apple to successfully develop its own LTE modem chips. Last year, AppleInsider reported rumors that suggested AAPL management was investigating in-house development of baseband processors. Taking it a step further, DigiTimes reported that the manufacture of those in-house-designed modem chips would be offloaded to Samsung Elect LTD (OTCMKTS:SSNLF).
INTC’s Mobile Division Has Struggled
INTC’s struggle for a foothold in the mobile silicon business was exacerbated by its inability to successfully market its Atom mobile processors, resulting in a year-over-year revenue decrease of 85% for its mobile and communications group in 2014. For the fourth quarter, that division’s net revenue was -$6 million along an operating loss of $1.1 billion. The negative revenue and operating loss stems from Intel’s practice of paying manufacturers to switch from ARM processors to the Atom chipset.
Last May, analysts at JP Morgan recommended the closure of Intel’s mobile and communications group after 2013 losses piled up to $3.1 billion. However, INTC trudged along, dumping in hundreds of millions playing catch-up behind Qualcomm. Between 2013 and 2014, Intel’s mobile and communications group amassed losses in excess of $7 billion.
(It comes as no surprise, then, that INTC will no longer break down the losses from its mobile division in annual and quarterly reports.)
It appears as if INTC efforts to remain a major player in the mobile silicon game — regardless of the actual cost — could eventually pay off, or at least start to generate much-needed revenue. Last year, AAPL sold approximately 193 million iPhones. This year, that figure should exceed 200 million.
If Intel modems are in a substantial enough percentage of new iPhone models, the resulting revenue for INTC (not to mention the return of a major household name to the front and center of the industry) can only be a plus.
Despite its inability to push sales of its Atom mobile processor, INTC remains a leader in the development of multiple chipsets for desktop PCs, laptops and netbooks, and mobile devices. Last week, INTC announced at the World Mobile Congress in Spain that it has been dedicating significant efforts to the advancement of biometric security measures for mobile devices. If its arrangement with AAPL is a hit, it’s possible that Apple may install some version of an Intel-designed biometric security chipset into a new iPhone down the road.
At least, that could be another light at the end of Intel’s tunnel.
In the medium term, INTC is a solid hold. Even though the company’s mobile division has been hemorrhaging money for the past few years, Intel is still a force to be reckoned with when it comes to silicon of any kind. An arrangement with AAPL to provide LTE modems in a new iPhone will bring much-needed revenue and recognition to the chipmaker’s struggling division, and could lead to future contracts for other silicon.
When AAPL eventually announces a new iPhone and confirms the presence of Intel chips, INTC stock should see a healthy bump.
As of this writing, Greg Gambone did not hold a position in any of the aforementioned securities.