QUALCOMM SHARES SINK AS APPLE WORKS ON ITS OWN 5G CHIPS

Stock price down 7.3 percent; analysts puzzled over news

Spooked investors sold off Qualcomm shares Friday after a news report that Apple has kicked off efforts to build its own cellular modem, which could allow it to ditch Qualcomm as a silicon supplier.

The 7.3 percent decline in Qualcomm stock price puzzled some Wall Street analysts, however. Apple’s intentions to build its own modems — the processors that help deliver bandwidth to smartphones — are well known. It spent $1 billion last year to acquire Intel’s modem business.

Moreover, Apple has expanded its engineering footprint in San Diego over the past year, leasing several buildings in Qualcomm’s backyard presumably to tap into the region’s wireless technology talent pool.

“This should not be any sort of surprise,” said Bernstein Research analyst Stacy Rasgon in a research report. “Apple’s purchase of Intel’s modem business suggested they intended to do something with it. And in fact, Qualcomm themselves have acknowledged that Apple will likely attempt to take some volume internal at some point.”

The key question is when would Apple be ready with a competitive 5G chip? Johny Srouji, senior vice president of hardware technologies for Apple, didn’t reveal a time

line when announcing the modem effort at a virtual town hall, according to Bloomberg.

“Notwithstanding Apple’s admittedly considerable semiconductor design expertise, modems are challenging beasts,” added Rasgon. “We note it took them five to 10 years to develop a viable PC processor even with annual iPad iterations, and modems are likely to present a greater challenge.”

Apple’s chip design prowess has been in the news recently when it replaced Intel chips with its own internally designed M1 core processor in computers. The M1 has received rave reviews in the technology press, and that could have contributed to the reaction from Qualcomm stockholders.

Apple and Qualcomm fought a two-year legal battle over patent royalties that ended in a settlement last year. As part of the deal, Apple paid at least $4.5 billion to Qualcomm and signed a sixyear patent license agreement.

Apple also inked a multiyear chip supply deal with Qualcomm. Its 5G modems are powering new iPhone 12 models.

Though details of the chip supply agreement haven’t been disclosed, analysts think it is not necessarily short-term.

“We believe Apple has a multiyear sourcing agreement (for Qualcomm chips) that is for more than two years and just started with the recent batch of new 5G iPhones,” said Mike Walkley, an analyst with Canaccord Genuity. “We also believe Qualcomm should remain well ahead of Apple’s modem efforts for several years.”

Walkley said Qualcomm could be shipping its fourth to sixth generation of 5G processors by the time Apple rolls out its first internal chip. Qualcomm’s third-generation 5G modems are launching next year.

“Given the complexity required for Apple’s global iPhone strategy, we believe Qualcomm is well positioned to support Apple for the next several years,” said Walkley.

Qualcomm has design prowess of its own around 5G, said Chris Caso, an analyst with Raymond James. It is currently the only chip maker with a working 5G modem in smartphones that supports millimeter wave — the high-frequency airwaves underpinning Verizon’s ultra-wideband 5G network and others globally.

Millimeter wave enables fast, fiber-optic-like download speeds to wireless devices. While Samsung and MediaTek have 5G modems, too, they only support slower low- and mid-frequency 5G bands at this time.

“That’s a challenging technology,” said Caso. “Given Apple’s embrace of the technology, in order to get their own modem into the iPhone, that’s a technology that Apple’s team would need to deliver.”

Caso added that the threat of Apple developing its own internal modem is “no doubt a risk,” but one that’s ref lected in the valuation of Qualcomm’s chip division.

“In the meantime, we think Qualcomm has a strong near-term tailwind from both the iPhone and China” smartphone makers, he said, “and we think Apple’s potential for success in developing a leading-edge modem is by no means assured.”

Qualcomm’s shares ended trading Friday down $11.47 at $144.28 on the Nasdaq exchange.