- Channel supply checks by a Wall Street analyst suggest that Intel might win supply of part of iPhone 7 modems contract from Apple.
- This will mark the first time Intel lands a major Apple contract.
- What are the implications for Intel's battered mobile processor business?.
Intel (NASDAQ:INTC) investors have for long wished it to happen: landing a lucrative iPhone component order from Apple (NASDAQ:AAPL). And now finally there is a good chance this wish might be granted and Intel’s long-suffering mobile ambitions might finally get a much-needed boost. CLSA’s Srini Pajjuri says that supply checks suggest that Intel might end up supplying 30-40% of iPhone 7 baseband modems. This seems to confirm an earlier report by VentureBeat which reported back in March 2015 that Intel’s XMM 7360 4G modems would go into lower-end iPhones aimed at emerging markets in Asia and Latin America in 2016. VentureBeat followed up on the report in October by announcing that Intel had hired more than 1,000 people to design the said modem for iPhone 7. The site also reports that Apple is interested in developing an SoC (System on Chip) that pairs an A-series app processor and a 4G modem, with Intel manufacturing the said SoC and also providing the modem IP.
In other words, Intel not only stands a good chance of supplying baseband modems for iPhone 7 in 2016 but could also be contracted by Apple to supply high-end SoCs for future iPhones. So this is basically great news for Intel stock and its investors. The revenue and EPS implications by the deal for the current year are, however, modest. Pajjuri estimates that if Intel does indeed win the baseband modem supply contract by Apple, it would imply a 1.5% increase in 2016 revenue and 2% increase in 2016 EPS. Before factoring in the Apple deal, the consensus was for Intel’s top line growth to expand 5.6% in 2016. The Apple deal might therefore help Intel exceed 7% growth in 2016 courtesy of the deal.
Intel, however, will have Qualcomm to contend with as it tries to win more business from Apple. Qualcomm holds a significant lead over Intel in baseband modems. Qualcomm recently unveiled the Snapdragon X16 that supports 1Gbps peak download speeds compared to 450Mbps that Intel’s XMM 7360 can manage. Qualcomm says that Snapdragon X16 will go into commercial products during the second half of 2016. If Intel wins the iPhone 7 modem deal, then Qualcomm could see its revenue and earnings curtailed by 4% and 2%, respectively, according to estimates by Pajjuri.
Intel’s mobile processor business has never really caught on as ARM (NASDAQ:ARMH) chips continue to dominate mobile processors. Intel was previously forced to book billions of dollars in contra-revenue losses as it tried to provide mobile device manufacturers with incentives to use its own chips instead of ARM chips. During the early years of the iPhone, Intel underestimated the ability of the device to scale and even sold Xscale, an ARM chip manufacturing business that would have helped the company gain a proper foothold in the burgeoning mobile chip business, to Marvel in 2006. Intel of course has since lived to rue its mistake, and probably has now received another chance to at least partly make up for its folly.
Meanwhile, there might be other reasons to invest in Intel stock. Several analysts have already started calling out a bottom on the battered semiconductor chip market. After falling 1.9% to $333.7B in 2015 as per estimates by Gartner, several analysts have already started calling out a bottom on the industry, and see the sector growth re-accelerating in 2017. One such analyst is David Wong of Wells Fargo who sees the chip industry growing 7% in 2016 and 8%-14% in 2016. Wong rates Intel and Qualcomm as Outperform and has this to say about semiconductor chip stocks in general:
"Over the last 5 years 2010-2015, semiconductor industry growth has tracked below global GDP for the most part. We think this has created significant pent-up demand created by the deferral of electronics goods purchases and aging of the installed base of electronics systems ... We think that there could well be the first signs of improvement in the year/year comparisons at some point in the June 2016 quarter in the many of the broader chip markets, including the industrial, communications infrastructure and PC markets."
Intel has also earned itself another upgrade from Baird’s Tristan Gerra, who thinks the company’s data center group, or DCG, is now big enough to drive growth for the company:
"After being on the sidelines for a few years on Intel, we think data center has reached sufficient critical mass within Intel's mix to drive a resumption in EPS growth starting in 2017 ... Assuming a low single-digit decline in annual PC revenue and a high single-digit growth rate in data center (below Intel's 15% growth target), DCG mix becomes large enough to drive EPS growth starting in 2017 and in years forward ... We believe Intel's LTE technology has matured, improving Intel's positioning for a potential tier-one smartphone ramp this second half."
Overall if Intel wins the baseband modem deal from Apple, it could have a big significance for the stock. At this point it’s not 100% clear whether Intel will engage in any contra-revenue arrangements with Apple to land the deal. VentureBeat had reported last year that Intel:
"has been willing to go a long way to get its LTE chips into Apple phones."
But the most important thing for Intel right now is that the world’s most successful smartphone manufacturer is willing to use its mobile chip sets. If Intel lands the Apple contract, it will finally have a real incentive to develop its mobile processors to a level where they can compete with those by Qualcomm and other leading suppliers such as Infineon. Ultimately this might prove to be a virtuous cycle and will help Intel win even more mobile processor business from other smartphone manufacturers.