Amid a soft session on Wall Street, technology giant Broadcom (NASDAQ:AVGO) slipped conspicuously, suffering significant viability concerns. On Monday afternoon, news broke that consumer tech stalwart Apple (NASDAQ:AAPL) will drop a key Broadcom partnership in favor of incorporating its own in-house chips and components. While AVGO stock unsurprisingly fell over 3% early Tuesday afternoon, the development isn’t exactly holistically beneficial for AAPL.
Naturally, though, Broadcom absorbed the brunt of the damage. According to a Bloomberg report, Apple represents Broadcom’s largest customer, accounting for about 20% of its revenue last fiscal year. Nominally, this allocation amounted to almost $7 billion. While potentially devastating for AVGO stock, it’s also important to realize that Apple will be taking huge risks. If the move doesn’t pan out, Apple could fall behind the technology curve.
Specifically, Apple plans to replace Broadcom’s Wi-Fi and Bluetooth chip. Presently, Apple is busy developing an in-house replacement for that chip. Ultimately, the goal centers on using the homegrown semiconductor in Apple devices in 2025. Further, the company is “already working on a follow-up version that will combine cellular modem, Wi-Fi and Bluetooth capabilities into a single component,” per Bloomberg’s report.
As part of the proposed shift in semiconductor production, Apple also seeks to have its first cellular modem chip by the end of 2024 or early 2025. Inside sources, who asked not to be identified, revealed that Apple will also swap out the electronic components that Qualcomm (NASDAQ:QCOM) currently produces. Initially, the consumer tech firm had planned to replace Qualcomm-sourced parts as soon as this year but suffered developmental obstacles.
AVGO Stock Faces Big Risks but Also a Lifeline
Inherently, AVGO stock suffers viability concerns due to the loss of the biggest customer for the underlying enterprise. According to Stacy Rasgon, an analyst with financial services firm AB Bernstein, Apple’s decision will negatively impact Broadcom’s revenue to the tune of about $1 billion to $1.5 billion.
Further, other experts worried about the longer-term implications of the proposal. “While it is well-known that Apple continues to move toward internally designing an increasing number of its components, from a Broadcom perspective, this likely creates an investor sentiment headwind given how significant Apple’s revenue contribution is,” said Wells Fargo analyst Aaron Rakers.
Notably for AVGO stock, however, Broadcom CEO Hock Tan isn’t yet hitting the panic button. “We believe we have the best technology and delivering value to our customers,” he said during a conference call last month. “There’s no reason to find something else where you’re not the best.”
Tan isn’t just grandstanding for the sake of AVGO stock. According to the Corporate Finance Institute, pivoting to in-house manufacturing presents many risks. One of them centers on high costs. Essentially, production specialists have long aligned their facilities for maximum efficiency. In some ways, then, Apple would be starting from scratch.
Why It Matters
Indeed, AB Bernstein’s Rasgon acknowledged that “Broadcom’s radio frequency, or RF, chips were complex to design and manufacture and were unlikely to be replaced in the short term,” per Reuters’ description. Therefore, the latest news isn’t completely bearish for AVGO stock.
In addition, Bloomberg mentioned the troubles that Apple had in its process to replace Qualcomm’s electronics. From overheating issues to battery life sustainability to component validation requirements (due to Apple’s global footprint), circumstances have not been easy for the tech giant.
Of course, that’s not to say that AVGO stock represents an easy contrarian buy. However, with the tech sector being incredibly specialized, Apple probably can’t afford too many missteps in its insular ambitions.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.