On Thursday, Apple (NASDAQ:AAPL) and Intel (NASDAQ:INTC) confirmed rumors that had been in circulation for weeks. Specifically, much to the delight of many owners of AAPL stock, the iPhone maker has decided to acquire Intel’s nascent 5G modem division.
Thank or blame Qualcomm (NASDAQ:QCOM) for Apple’s move. For years, QCOM wrangled with Apple over Apple’s use of its patented technologies. Those hostilities came to an abrupt, though suspicious, end in April of this year.
That’s when Apple essentially acquiesced to Qualcomm’s licensing demands, with the two outfits inking a supply deal that makes Qualcomm the supplier of 5G wireless modems for the iPhone for the next six years. That’s roughly how long it will take Apple to turn Intel’s unit into a high-power chip maker that will enable Cupertino to be completely independent from Qualcomm.
Just as importantly (if not more importantly), the deal gives AAPL roughly 8500 5G modem-related patents that should help keep Qualcomm’s patent-enforcement efforts in check.
An Inevitable Outcome
The transaction shouldn’t come as a surprise to the owners of AAPL stock, who for years watched Apple and Qualcomm tussle in court over their patent impasse. Apple CEO Tim Cook said as far back as 2009, when he was still Apple’s COO, “We believe that we need to own and control the primary technologies behind the products that we make.”
The tech giant has spent a great deal of time increasing its control of its products’ components and of its ecosystem. Indeed, that high degree of control has now left the company vulnerable to antitrust enforcement actions.
But the deal with Intel finally, directly addresses the ever-growing intellectual property headaches involving Apple’s iPhone, which in the past had largely been resolved by AAPL simply agreeing to pay licensing fees.
The deal with Intel was also the right step, and, by many measures, it was the inevitable step.
The Impact on Apple Stock Price
However, investors hoping that the transaction will have an immediate, beneficial impact on AAPL stock may not want to hold their breath.
“I don’t see these assets translating into anything that has the chance to challenge Qualcomm for three to five years,” commented Patrick Moorhead, Moor Insights & Strategy’s lead analyst.
Moorhead goes on to say “It took Samsung and Huawei eight to ten years to field competitive modems, and while Apple’s acquisition gives it a head start, consider those companies have networking [equipment] assets, making designing a modem easier.”
But the deal gives AAPL 17,000 5G patents, enabling it to create a so-called “system on a chip” tech, or SOC for short.
According to Creative Strategies analyst Ben Bajari, “the short-term opportunity is that building the modem onto their SOC will let them do things like tune the software better, and improve battery efficiency.”
That’s a nuance iPhone owners will appreciate, even if it does little to boost Apple stock price in the short-term.
But the deal can boost Apple’s financial results over the long-term, potentially lifting AAPL stock in the process. As patent attorney Erick Robinson, who used to work with Qualcomm, noted “I don’t think Intel has quite the portfolio that Qualcomm has, but they certainly have a large enough one to impact the valuations when it comes to a cross-licensing deal. It’ll save (Apple) a huge chunk of change in cross-license deals.”
The Outlook of AAPL Stock
In short, the transaction is the beginning of a long, very slow game for Apple. The game’s pace, in fact, may be imperceptible, and on its own, it’s definitely not a reason reason to buy Apple stock today.
It’s a significant move all the same though, and could prove even more significant if Apple continues to move towards self-sufficiency on multiple fronts by making more components of its products in-house. And that does seem to Apple’s strategy, as the Intel deal is the biggest single leap that AAPL has taken in that direction.
Undoubtedly the matter will come up during the Q&A portion of Apple’s upcoming earnings conference call, scheduled for tomorrow after the market closes.
In the meantime, the deal should be a warning to other outfits that are currently collecting royalty payments from Apple.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
