Kulbinder Garcha with Credit Suisse this morning weighs into the debate over whether Intel (INTC) will take some share of baseband modem chips from Qualcomm (QCOM) in Apple’s (AAPL) next iPhone, which is being referred to as an iPhone 7.
Yes, writes Garcha, who has an Outperform rating on Qualcomm, Intel may take as much as a third of unit share in the iPhone 7 away from Qualcomm, based on research done by Garcha and his colleagues.
Still, Garcha, who’s been hearing about this “chatter” for months, thinks he’s “already accounted” for it in his long-term projections for Qualcomm, and he’s sticking with the stock because “a recovery at Samsung, rising revenue diversity and gradual compliance from Chinese vendors means Qualcomm has ~$5.61 of EPS power LT (CY17), making the stock inexpensive.”
Garcha’s note follows a note yesterday from James Faucette of Morgan Stanley arguing that Intel is preparing a ramp of production at manufacturing partner Taiwan Semiconductor Manufacturing (TSM) that suggests Intel will, indeed, take some share from Qualcomm.
If Intel gets as much as 30% of iPhone 7 baseband units, writes Garcha, here’s how it might play out:
For CY17, this could amount to a loss of $670mn, at $12.5 ASP and with an incremental margin of 50%. Next year, this could cause as much as a $0.37 headwind to EPS. We do note there are still some issues to be resolved, such as Apple moving away from its one SKU strategy as well as interoperability with CDMA. However, we believe that is more a case of if, and not when this may occur.
But here are the offsets that will help Qualcomm:
For QCT, we assume that Qualcomm wins back 50% apps share at Samsung’s S7/S7 Edge flagship phone (already announced at MWC Barcelona), lose share at Apple (as much as 50% over time), while continuing to diversify the business in other areas (IoT, Automotive). We see QCT revenues potentially rising to >$20bn (~15% above our current projection), and EBT to $3.6bn (18% OM), implying >30% upside to our current projections. For QTL, we see gradual compliance taking effect within China, rising to 80% over time, which could drive QTL revenues to ~$8bn LT from $7.3bn last year. Combined, we see this driving CY17 EPS power of $5.61, vs. our estimate of $5.20, and consensus of $4.79.
Garcha’s colleague, John Pitzer, who has an Outperform on Intel, notes the financial impact would be small at first for Intel, but the diversification away from the PC market is important:
Lastly, while we are still pondering how INTC navigates the CDMA “issue” – recently acquired Via CDMA IP has not been incorporated into INTCs modem yet – we are finding increasing evidence that INTC is likely to gain share in the iPhone 7 – and while the economic benefit is minimal (Rev/EPS of $266m/$0.02 in CY16) – the multiple/perception impact is not. While INTC cannot escape the effects of a weaker than expected PC market, a diversification strategy which has grown non-PC Rev from less than a third, to almost a half over the last 3-5 years – has greatly limited its impact.
Qualcomm stock this morning is up 29 cents, or half a percent, at $52.24, in early trading, while Intel stock is up 24 cents, or 0.8%, at $31.10.
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