Apple's Strategic Plan for Cellular Modems

Apple Inc. (NASDAQ: AAPL) reportedly is in discussions to acquire Intel Corp.’s (NASDAQ: INTC) cellular modem business, including a portfolio of patents and staff valued at around $1 billion. The Wall Street Journal first reported the talks, based on reports from unnamed sources.

Apple’s long-running dispute with modem supplier Qualcomm Inc. (NASDAQ: QCOM) was resolved in mid-April, bringing to an end a string of lawsuits and countersuits. The settlement likely was due in no small part to Intel’s failure to deliver on a 5G cellular modem that would have freed Apple from Qualcomm’s clutches. Intel quickly announced plans to cease development on its cellular modem.

Analysts at Wedbush issued a note late Monday calling the potential acquisition a “doubling down” by Apple on 5G technology, which they called “the centerpiece of [Apple’s] smartphone future.” An acquisition of Intel’s modem assets would provide Apple with “further control over its supply chain and core chip design.”

The downside for Apple will be to stem the estimated $1 billion annual loss in the modem group. Wedbush estimates that Apple could cut those losses by 75% in 18 to 24 months following sharp cost-cutting and research and development integration.

For Intel, which was widely believed to be shopping the modem unit, the $1 billion price tag is below the “few billions” that the chip giant had anticipated. The reported sale price gave Intel’s share a boost on Monday because it appears investors “are just happy [Intel] found a buyer.” Wedbush goes on to say that divesting the modem unit could benefit profitability next year but that it will have little impact on Intel’s valuation. Going forward, the question is whether Intel will “divest other less profitable (and strategic) portions of its business (e.g., NAND).”

Then there’s Qualcomm. As part of its settlement with Apple, the two companies agreed to a six-year license deal, but that deal applied to 4G modems. While Apple is unlikely to ship a lot of 5G iPhones until late next year, in the longer term having its own modem development group “would certainly weigh on future [Qualcomm] revenues, particularly given [Apple’s] propensity to fully replace 3rd party suppliers when internal parts prove adequate.”

Apple shares posted a gain of about 2.3% Monday and traded up another 0.4% early Tuesday to $208.00, in a 52-week range of $142.00 to $233.47. The stock’s 12-month consensus price target is $213.41.

Intel stock traded up about 2.2% on Monday and added another 0.6% Tuesday morning to trade at $51.69. Intel’s 52-week range is $42.36 to $59.59, and the 12-month price target is $51.12.

Qualcomm added 1.3% on Monday but dropped about 1.8% Tuesday morning to trade at $74.55. The stock’s 52-week range is $49.10 to $90.34, and the 12-month consensus price target is $86.51.

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