Implications Of Apple Inc. (AAPL) & Intel Corporation (INTC) Break-Up

Updated on

Recent reports suggest that Apple Inc. (NASDAQ:AAPL) is planning to displace Intel Corporation (NASDAQ:INTC) chips with its own chipset designs for its Mac product range. Intel management recently dismissed these rumors.  However, Nomura research firm’s checks suggest that Apple is working on new chipset designs with power levels that likely exceed the requirements of an iPad class device. According to Nomura equity research analysts, this could be indicative of a longer-term shift to the use of its own chipsets in its Mac line. In this note, the firm detail the likely dynamics and implications of Apple Inc. (NASDAQ:AAPL) making this transition.

Implications Of Apple Inc. (AAPL) & Intel Corporation (INTC) Break-Up

Apple motivation: product integration, ARM roadmap & cost.

Nomura believe Apple Inc. (NASDAQ:AAPL) might look to switch Mac OS from Intel to its own AX ARM based chipsets for three main reasons:

* Vertical integration of the Mac OS and underlying chipset could improve the user experience and allow a tighter integration with the iPad, and so drive further conquest sales from PCs.

* The barriers to developing an in-house chipset solution appear to have fallen sufficiently to make it a viable solution for Apple. Importantly, the ARM roadmap promises a step up in power sufficient to support desktop style applications, while also offering a better power to efficiency balance than x86 chipsets.

* ARM based chipsets offer over $100 cost savings relative to i5/i7 chips.

Implications for Apple: up to $6.50 EPS uplift & tighter control.

Analysts from Nomura estimate that if Apple Inc. (NASDAQ:AAPL) were to keep all the potential cost savings and boost Mac sales by an additional 4m a year that group EPS could see a $6.50 uplift. Realistically, however, the firm would expect Apple to use lower costs to either cut prices or to facilitate greater product differentiation, resulting in an EPS uplift of closer to $1 – 2.

The research firm retain its Neutral rating to reflect the view that iPhone gross margins will come under pressure longterm, limiting Apple Inc. (NASDAQ:AAPL)’s earnings power to $50-60 per share.

Implications for Intel: no near term impact; likely overhang on PE.

* Apple’s shift away from Intel could accelerate ARM’s share gains at other PC OEMs. As such, current third party forecast of 10-15% share gains by ARM in PCs by 2015 could prove to be a realistic scenario.

* In addition, Intel Corporation (NASDAQ:INTC)’s share gains in mobile may not fully offset the impact. This is due to Intel’s unfavorable tradeoff in share loss in PCs and equivalent share gain in mobile devices.

* Furthermore, Nomura expect this to increase pressure on Intel Corporation (NASDAQ:INTC)’s ASPs, causing revenue compression. We estimate a 5% impact on PC client ASPs will reduce Intel’s EPS by $0.07-$0.08.

* To offset this, Intel could speed-up its foundry efforts, in analysts’ view. However, payoff from this is likely to be 4-5 years away.

Nomura maintain its ‘Reduce rating’ and $19 price target for Intel Corporation (NASDAQ:INTC).

Leave a Comment