Apple's (AAPL) acquisition of Intel's (INTC) modem business is a clear signal that Apple is looking forward to a 5G future.
A week before their anticipated earnings, after Tuesday's market close, Apple signed an agreement to acquire for $1 billion the majority of Intel's smartphone modem business, adding thousands of Intel employees, as well as the company's IP and patents.
"We've worked with Intel for many years and know this team shares Apple's passion for designing technologies that deliver the world's best experiences for our users," said Johny Srouji, Apple's senior vice president of Hardware Technologies. "Apple is excited to have so many excellent engineers join our growing cellular technologies group, and know they'll thrive in Apple's creative and dynamic environment. They, together with our significant acquisition of innovative IP, will help expedite our development on future products and allow Apple to further differentiate moving forward."
Along with the over 2,000 headcount growth, Apple will acquire 17,000 wireless technology patents for telecommunications and smartphone tech.
"We have long respected Apple and we're confident they provide the right environment for this talented team and these important assets moving forward," Intel CEO Bob Swan added. "We're looking forward to putting our full effort into 5G where it most closely aligns with the needs of our global customer base, including network operators, telecommunications equipment manufacturers and cloud service providers."
Risk Factors for 5G
Despite what these executives say, there remain some headline questions surrounding the agreement.
For one, Intel is clearly selling because it cannot keep up with company's further ahead in 5G technology. Apple's agreement with Qualcomm (QCOM) after years of courtroom battles bears this out.
Additionally, Intel has consistently shown losses on the business as its timelines for production are consistently prolonged, allowing competitors to cut into its market share. Analysts have estimated losses from the division at $1 billion per annum, as a real breakthrough still appears at least a few years off.
Spending on a Centerpiece
Still, the importance of 5G in shifting the dynamics of the smartphone market cannot be overstated in the minds of many Apple watchers highlighting the positives of the deal.
"For Cupertino this is a clear 'doubling down' on 5G which remains at the centerpiece of the company's smartphone future with these chip assets giving Apple further control over its supply chain and core chip design," Wedbush analyst Dan Ives said. "Once this acquisition is integrated into the Apple ecosystem we believe these [Intel[ losses will be reduced significantly over the next 18 to 24 months on the bottom line after much needed cost cutting and R&D integration."
Real Money technology columnist Eric Jhonsa estimated that Apple "could easily save over $1 billion per year" by bringing 5G chip technology more firmly in house.
"In that context, the idea of Apple spending $1 billion or more to strengthen its modem R&D efforts has some logic to it," he added.
The deal, due to close toward the end of the year, sets up Apple to produce a lower cost 5G phone by 2020, aided by a closer relationship with Qualcomm to sustain nearer term demand and keep up with competition, as well as the potential ability to mitigate these key partner risks in the long term.
Given the tenuous nature of its Qualcomm partnership, an alleviation of this reliance is clearly reduces risk.
For investors, that creates an opportunity to get ahead of the trend for investors and position for the smartphone cycle shift.
"We expect investors to shift focus to the potential 5G iPhone in September 2020," Morgan Stanley analyst Katy Huberty commented. "Historically Apple shares begin to price in significant iPhone launches up to 9 months ahead of the launch date."
Though she said she sees near term downside to iPhone shipments, the upgrade cycle for 5G that will be helped along by the Intel deal and should have a more meaningful impact to iPhone shipment growth as compared to iPhone X, which was launched at a time when replacement cycles were lengthening due to the shift away from handset subsidies.
Huberty advised that longer term investors can expect 7% iPhone unit growth in fiscal year 2021 and 10% revenue growth from the segment.
Apple's Dealmaking
Yet, what is perhaps most interesting for Apple is the anomalous nature of its recent acquisition.
The company has been strongly averse to billion dollar buyouts in the past, with its largest ever acquisition being Beats by Dre, at $3 billion. Up until the Intel deal, this was the sole acquisition to top the 10 figure mark.
"For [CEO Tim] Cook, doing an acquisition of $1 billion is a change in tune around larger M&A, as we continue to strongly believe this is the start of a much more aggressive Apple going forward on the acquisition front," Wedbush's Ives forecast.
Any commentary on this front could be crucial to the continued trajectory of Apple shares, making the conference call much more important than in previous quarters.
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