Apple Continues To Bully, Only This Time It’s Qualcomm

Qualcomm shares were down 8.4%, at $142.66, in recent trading, while Skyworks was down 4.4%, at $139.16, and Qorvo was off 4%, at $151.95. The S&P 500 was down 0.9%.

After recently making a bold pivot to roll out its own line of microprocessors for Mac laptops, Apple’s [$AAPL] chip wizards are redirecting their focus to internal production of wireless modem chips for iPhones and other devices.

On Thursday, Johny Srouji, Apple’s senior VP of hardware technologies, divulged in a staff meeting that the company has started manufacturing modems for future iPhone models. Fun fact incoming; Apple bought Intel’s [$INTC] mobile modem business for $1 billion in 2019, The latest phones use modem chips from Qualcomm [$QCOM], and as the story notes, Apple has a six-year licensing deal with Qualcomm as part of a 2019 patent agreement.

That headline sent Qualcomm shares freefalling in Friday trading, which also put pressure on shares of both Skyworks Solutions [$SWKS] and Qorvo [$QRVO], who manufacture radio chips for Apple. [Apple Continues to Bully Intel]

Raymond James chip analyst Chris Caso writes, “Apple was very clear to us when they acquired the Intel team that they did so with the intention of building their own modem, and eventually replacing Qualcomm. Investors know this, and it’s the principal part of the bear case for Qualcomm. However, the question is about if and when Apple’s initiative will be successful.”

“This year, we kicked off the development of our first internal cellular modem, which will enable another key strategic transition,” Apple’s senior vice president of hardware technologies, Johny Srouji said.

Caso said he asked Apple CFO Luca Maestri about this conundrum earlier this year, and that while he confirmed plans to build modems, Maestri said it would be a “long journey.” Caso said industry contacts think Apple won’t have a market-ready modem before the second half of 2022.

“And whether that modem would be a leading-edge modem suitable for a flagship iPhone is the main question,” Caso adds. “We believe the sustainable competitive advantage Qualcomm has in modems is due to the fact that their licensing group develops and updates the standards. That allows Qualcomm’s chip division to be the first to implement the updates into silicon and has kept Qualcomm ahead of MediaTek, Samsung and Intel, which chose to exit the business.”

The reality is, Caso says, is that the threat of Apple’s modem development really is a risk for Qualcomm investors; “In the meantime, we think Qualcomm has a strong near-term tailwind both from iPhone and China OEMs—and we think Apple’s potential for success in developing a leading-edge modem is by no means assured,” he writes. Caso reiterated his Strong Buy rating on Qualcomm.

“Long-term strategic investments like these are a critical part of enabling our products and making sure we have a rich pipeline of innovative technologies for our future.” — Srouji

Wells Fargo analyst Gary Mobley doesn’t see this as a new hardship for Qualcomm—but he does consider it a serious one. Mobley writes that he has known for some time that it was a strong possibility that Qualcomm would be a modem supplier to Apple only for three or four years; he thinks the parts could show up first in the Apple watch, and might appear in iPhones in 2023.

Mobley mentioned earlier this year that he worried the issue would be a lingering one for Qualcomm investors, “which is why we have been reluctant to chase the company’s strong recent fundamentals and share price performance with a ratings upgrade.” He added that Apple might not be the only handset maker headed in this direction—whats more, Samsung is already in the process of making modems, and players like Xiaomi, Vivo, and Oppo could eventually follow suit.

Citigroup analyst Atif Malik writes in a research note that the next logical step would be for Apple to take RF radio chips in house, as they work hand in hand with both the modem and the applications processor (which Apple already designs in house). That could be a long-term challenge for both Skyworks and Qorvo, as Apple accounts for 50% of revenue at Skyworks and 30% at Qorvo.

Apple introduced 5G modems for the first time this year in its iPhone 12 lineup, but the phones use modems made by Qualcomm. When Apple completes its work on its own modems, it is likely to drop the Qualcomm modems from most or all of its phones.

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