Intel Corporation: Why the iPhone Rumor Brings New Hope to INTC Stock

Good news for Intel Corporation (INTC) investors who have been lamenting the company’s weak presence within the smartphone market — rumor is, the once iconic processor and chipmaker may have already stolen some business from Qualcomm, Inc. (QCOM) as a supplier for the Apple Inc. (AAPL) iPhone. Specifically, some believe Intel is going to at least partially supply the modem chip onboard the next generation of the iPhone.

Why the iPhone Rumor Brings New Hope to Intel StockAs for the impact such a win may have on the value of Intel stock, it depends on the degree of penetration and the timeframe in question. In the near-term, making one piece of the world’s most prolific smartphone won’t be earth-shattering. In the long run though, contributing to the iPhone’s innards now may prove to be a valuable toehold back into the lucrative market.

It’s tough to believe the company that became almost synonymous with PC processors has been pretty much left out of the smartphone race. But, it’s true. Most of the early smartphones tapped technology from ARM Holdings plc (ADR) (ARMH) despite the investment Intel made in Mike Bell — a former Apple guy — to come up with a killer phone chip. ARM chips were simply too efficient and cost-effective to compete with.

Once Intel recognized it couldn’t join ’em, it set out to beat ’em by making its own smartphone, a product that faded away without ever really getting started.

So why would owners of INTC stock think the company can do now what it couldn’t do then? Well, it may have as much — if not more — to do with Apple as it does Intel.

Qualcomm currently controls an estimated 60% of the baseband (modem) processor market. Perhaps for no other reason than to keep Qualcomm honest and make sure it has a cost-effective supply in the future, Apple wants to keep Intel in the smartphone business.

Then again, it’s not as if Intel hasn’t earned a shot. Last year it devoted 1000 employees solely to making iPhone hardware. It would be surprising if Apple didn’t test the redesigned technology out.

Fine, but what kind of impact might this foray into iPhones mean for Intel stock?

Look at the Big Picture For Intel Stock

Only suppositions can be made, as Qualcomm, Intel and Apple are all rather cryptic about where their revenue and earnings come from. But, the guesses from the experts are pretty good, and can be algebraically used as a means of coming up with a rough number.

Bernstein analyst Stacy Rasgon may have the most foundational numbers to start (and even finish) with. He says Apple’s business is worth about a dollar’s worth of earnings per share to Qualcomm. Some back-of-the-envelope math suggests, then, that Apple’s business is worth about $1.6 billion in annual earnings for QCOM.

Problem: Qualcomm isn’t losing all of its Apple business to Intel. Even if it only lost 30% of the modem business to Intel, it would only cut about 7% off the QCOM per-share bottom line in 2017. That’s something on the order of 33 cents of the $4.76 QCOM is supposed to earn on a per-share basis in 2017.

That’s roughly $400 million in income, based on current projections and trailing numbers. As for what another $400 million in net income would do for Intel stock were Intel to garner it rather than Qualcomm, that should add approximately 9 cents to the profit of $2.41 per share of INTC the pros are calling for this year.

It’s not a lot of money, and to be clear, it hasn’t officially been secured by Intel yet. Then again, that was never the point.

Bottom Line for Intel Stock

More money is always better than less money, but for only $400 million more in “maybe” additional earnings in a year, it would seem all the hubbub hasn’t been merited.

What’s the big deal?

This isn’t about getting a modem chip placed on the board of some smartphones. This is about Intel becoming relevant in the smartphone market by making a part of the most prolific one of all. It’s a foothold from which to grow, perhaps eventually parlaying it into becoming a provider of the processor (and more) that powers the iPhone.

The processor alone would be significant, and that’s just one piece.

At the same time, more than 200 million iPhones were sold last year, and that’s just one manufacturer. Total smartphone sales neared 1.5 billion in 2015.

Owners of Intel stock have a decent reason to be excited about the iPhone rumor, even if it takes a while for the company to turn it into something more.

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

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