Intel Corporation (NASDAQ:INTC) is apparently believed to be courting the opportunity to supply ARM chips to Apple Inc. (NASDAQ:AAPL) as the iPhone maker’s relationship with the Korean-based Samsung Electronics Co., Ltd. (LON:BC94) continues to deteriorate.
In a report published Monday, Morgan Stanley (NYSE:MS) analysts Joseph Moore, Vidya Adala, and Daniel Fuss noted that Intel is looking to capitalize on Samsung’s woes in the supply of ARM chips to Apple. Intel Corporation (NASDAQ:INTC) has a high reputation for its microprocessor business for personal computers. However, Intel recently lost its title as the global leader in chip production to QUALCOMM, Inc. (NASDAQ:QCOM), which specializes in smartphone memory chips.
Additionally, tablets are also cannibalizing on the PC industry which is likely to deter Intel’s plans of retaking its position as the global number one chip maker. The markets are switching to mobile devices, and not even laptops can conquer the migration to mobile wave.
Therefore, a deal with Apple Inc. (NASDAQ:AAPL) to supply ARM chips would certainly boost the company’s revenue, but the biggest question is “by how much?”
In the report, the analysts pointed that while Intel Corporation (NASDAQ:INTC) stands to gain from the deal, it is likely to be immaterial in terms of impact to its revenue, and consequently the market share. The analysts wrote, “with strains in the relationship between Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (LON:BC94), recent media speculation has been that they could win some business making ARM chips for Apple. We analyze the opportunity with some key questions/assumptions about profitability, and conclude the impact is likely small”.
The analysts wrote in reference to a report published on CNN Money on Nov.30th, which suggested that following the continuous strain on the relationship between Samsung Electronics Co., Ltd. (LON:BC94) and Apple Inc. (NASDAQ:AAPL) , Intel was a likely candidate to take over the business from the Korean Electronics giant. Additionally, Intel’s CEO recently noted that the company could sign a foundry deal with a partner who is not a competitor, a statement that further, fueled the speculation that a deal was inevitable between the two tech giants.
Nonetheless, the analysts identified key questions with regard to the rumored deal in terms of profitability to Intel as compared to other suppliers, like TSMC and Samsung. The analysts are of the opinion that Intel might not be as profitable as TSMC. The analysts examined three key challenges for Intel in the deal.
Intel’s wafer cost is likely a substantial premium to TSMC and Samsung; even assuming a price premium, this could as well suggest a profit margin below foundry average.
There is also the question of how long it would take to migrate Apple’s products to an Intel transistor/foundry. It could be at least two years, earmarked the analysts.
The third question was whether Apple Inc. (NASDAQ:AAPL) would require dedicated capacity, as opposed to MPU overflow, requiring ongoing capex support.
All of these factors add a premium to the normal cost incurred by the likes of TSMC and Samsung Electronics Co., Ltd. (LON:BC94). Therefore, if Intel takes 40% of Apple’s foundry business in 2015, the best estimate is that it would account for $1.7bn in revenue at 12.5% operating margins, a ~$0.03 EPS positive impact. Furthermore, the analysts were still skeptical about their assumptions.
At the time of this writing, Intel Corporation (NASDAQ:INTC) stock was trading at $20.13 per share, down $0.03, or a 0.15 percent decline form the previous close.