Shares of Qualcomm (QCOM) are under pressure on Tuesday following a media report saying Apple (AAPL) is in advanced talks to acquire Intel's (INTC) smartphone modem chip business for about $1B. Commenting on the news, Wedbush analyst Daniel Ives said he views the deal as a "smart strategic move," and sees the weakness in Qualcomm's shares as justified as the purchase would increase the likelihood a portion of Apple iPhones ship with 4G modems in 2020, and would weigh on future Qualcomm revenues.
APPLE CONSIDERING $1B DEAL FOR INTEL MODEM BUSINESS: Apple is said to be in advanced talks to acquire the smartphone modem chip business of Intel and could pay $1B or more for the assets, which include Intel's patents and staff, The Wall Street Journal's Dana Cimilluca, Cara Lombardo and Tripp Mickle reported on Monday, citing sources. The authors stated that Intel's smartphone operations have been losing about $1B annually and have underperformed expectations, with the deal said to allow the company to direct its focus on 5G technology.
'SMART' STRATEGIC MOVE: Following the news, Wedbush' Ives told investors that for Apple, this would be 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. Ives believes it was largely anticipated that Intel would sell off its modem business, and while the speculated $1B is below the "few billions" that were initially contemplated, the analyst believes Intel stock's positive response to this report is a sign that investors are just happy it may have found a buyer. Further, he argued that this divestiture could benefit 2020 profitability, but does not really shift his view of Intel's valuation with the stock already trading at the high end of a longer-term range and his model had not specifically contemplated a negative impact of winding down this business in 2020.
With Qualcomm's shares down after the news, Ives pointed out that the move is justified as the purchase increases the likelihood a portion of Apple iPhones ship with 4G modems in 2020. Moreover, Apple building its own modems would "certainly weigh" on future Qualcomm revenues, particularly given the iPhone maker's propensity to fully replace third party suppliers when internal parts prove adequate, he contended.
Voicing a similar opinion, Deutsche Bank analyst Ross Seymore told investors that if Intel were to sell its modem business to Apple, it would be an incremental positive for the company. For Qualcomm, however, such a deal would be an incremental negative, as it would create a "latent risk" of a design-out, the analyst argued, adding that the acquisition would have a largely neutral impact to Apple's stock.
NOT A SURPRISE: Also commenting on the news, Bernstein analyst Stacy Rasgon said that while it may help Intel sentiment momentarily, this should not be a surprise. Intel has been vocal about its plans to exit the business, the analyst noted, pointing out that Apple is "the most natural buyer."
REDUCED MERCHANT COMPETITION: The deal would address long speculated Apple intentions to vertically integrate within mobile devices and provide additional leverage in ongoing Qualcomm negotiations, Roth Capital analyst Scott Searle said in a research note of his own. The analyst added that he would view this event as positive for Sequans (SQNS), as it underscores the inherent 4G and 5G value of the company. With another potential 5G asset off the table, Sequans would benefit in part due to increasing scarcity of non-Chinese and non-vertically integrated 4G and 5G silicon suppliers, he contended, adding that he expects that all non-Apple Intel baseband customers would become fair game for other merchant suppliers such as Sequans.
PRICE ACTION: In morning trading, shares of Apple have gained about 0.5% to $208.28, while Intel's stock is fractionally up to $51.39. Reacting to the news, shares of Qualcomm have dropped over 2% to $74.25.
