Apple’s Chip Strategy Is Great News for Shareholders, Bad News for Skyworks, Broadcom, and Qualcomm


apple (AAPL 1.01%) The world’s largest company, Warren Buffett’s largest holding, and one of the most successful stocks of the century.

But even with its impressive record, its management hasn’t rested on its laurels. To improve its products and maintain or grow its already high margins, Apple has embarked on a new strategy. Designing more and more semiconductors for smartphones, computers, and other electronic devices.

There are some risks involved in this plan, but if successful, it could also bring many benefits to Apple. On the other hand, the company’s strategy should remain a standout for major component suppliers. Qualcomm (QCOM -0.25%), broadcom (AVGO 0.58%)When Skyworks Solution (SWKS -2.10%).

Apple’s vertical integration efforts so far

When a company manufactures more sub-components that are incorporated into the final device, it is a strategy called vertical integration.

It’s worth noting that this has been an aspect of the Apple brand since its inception. Unlike other device makers, Apple has never used the industry-standard Windows operating system for PCs or the Android operating system for smartphones. Rather, Apple has its own macOS and iOS operating systems, allowing for tighter integration with hardware components and design.

As such, Apple has always tied proprietary software to hardware. However, the company’s expertise lies in design and does not manufacture semiconductors for its devices. Semiconductor manufacturing in the 20th century was expensive and required a lot of design and manufacturing expertise.

But as Apple got bigger, it had more resources to invest in research and development. In the 2000s, the semiconductor industry also began to gravitate towards the outsourced foundry model. In this model, third-party chip makers snowballed in manufacturing expertise and scale, while allowing “fabless” chip designers to operate without the high cost of manufacturing infrastructure. . This meant that Apple could build its own internal chip designer.

In 2010, Apple announced the A-series system-on-chip for the iPhone. It contained its own CPU and GPU along with other intelligence.And in 2020, Apple ditched intelused processors for Mac computers and replaced them with proprietary M-series CPU processors. In 2019, Apple acquired the Intel division that makes cellular modems, the hardware components that connect mobile phones to mobile cell towers. According to Bloomberg, Apple has yet to stop using modems from Qualcomm (the dominant player in that niche) in its phones, but plans to move away from them by 2024 or 2025. And just a few weeks ago, Bloomberg reported that Apple is considering replacing Broadcom’s radio frequency and wireless charging chips with its own by 2025. I’m still indecisive on that front.

Apple’s Risks and Rewards

Clearly, if Apple were to design its own chips, it would have to invest in research and development. Plus, there’s the risk that Apple’s internal teams won’t be able to come up with better components than the current suppliers that specialize in chip design.

On the one hand, the obvious potential benefits seem to outweigh the risks. First, Apple can integrate its component designs into one of his final products, so its engineers should be able to design chips that work best with each other in the context of the entire device system.

Apple will have to invest more in R&D, but the gross margin savings should make up for it. Over the last 12 months, Qualcomm’s gross margin was 58%, Broadcom’s gross margin was 75%, and Skyworks’ gross margin was 47%. Apple sells its devices at such a large scale that vertical integration can lead to significant savings.

In fact, the margin savings already achieved by in-house component design are already substantial. Although costs skyrocketed last year due to rising material and shipping costs, Apple stabilized the price of his iPhone in September, keeping the price of the Apple Watch at a lower-than-expected level, helping tech surprised his watchers. It’s estimated that just replacing Intel chips with in-house Series M chips in Macs alone could save Apple $2.5 billion in licensing fees annually.

Image Source: Getty Images.

WHO IS AT RISK?

Clearly, the potential loss of some or all of Apple’s business could be a headwind for Skyworks, Broadcom and Qualcomm stocks. Last year, Apple accounted for about 21% of his Qualcomm’s revenue. However, even if Apple can replace his Qualcomm chip with its own, it may still have to pay patent licensing fees to chip makers. So Qualcomm may not lose 100% of Apple’s revenue.

According to Bloomberg, Apple accounts for about 20% of Broadcom’s revenue. So for that component manufacturer, the risk is greater, assuming that component will be replaced in 2025. And confirming that Apple plans to phase out the use of Skyworks’ components. There are no definitive reports, but it would be a much bigger deal for the company: Apple accounts for 58% of Skyworks’ revenue.

Of course, this is all known in the market, with Qualcomm trading at 12x its earnings forecast this year, Broadcom trading at 14x its earnings forecast this year, and Skyworks trading at 9x its forecast this year. This is probably the reason why 22 profit margins.

Nor are these companies standing still. Qualcomm is capturing market share from other vendors with its high-end 5G phones and aggressively growing new automotive and Internet of Things (IoT) chip units.Broadcom is in the process of acquiring a software giant VMware at $61 billion. Skyworks then began trying to diversify away from Apple, acquiring Silicon Laboratories in 2021.

Which Stocks Should I Buy?

These three Apple suppliers are likely to do business with Apple’s overhangs for at least the next few years. And each company will have to survive and diversify its business away from its dependence on the iPhone giant, but as Broadcom’s big VMware bid shows, that can be expensive. There is a nature.

Meanwhile, Apple seems to be planning to continue to deepen its technology moat and expand its control over its supply chain. So despite its much higher valuation, Apple’s market dominance makes it a safer strategy for investors.

Meanwhile, Skyworks, Broadcom, and Qualcomm’s relatively cheap valuations could lead to unexpected upside if other revenue streams for automotive, IoT, and other types of chips outperform expectations or hold up. There is a possibility. It’s been impacting Apple’s bottom line for longer than expected. But while these suppliers could make significant profits, it’s not as certain as Apple’s continued strength.


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