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Apple May Buy Intel's 5G Modem Business, ETFs to Rally

Sanghamitra Saha

Apple Inc. AAPL is probably on the verge of buying Intel Corp.’s INTC smartphone-modem chip business for about $1 billion, per Wall Street Journal. Apple shares rose 2.3% on Jul 22 while it added 0.4% after hours. On the other hand, Intel shares inched up 2.2% on the day and advanced about 1.2% after hours. The prospective deal seems a strategic fit.

In April, Intel said it would no longer make 5G modems for smartphones, citing "no clear path to profitability and positive returns" in the smartphone modem business, per CNN. News doing rounds is that the division was losing about $1 billion a year.

On the other hand, Apple looks primed to take full control of the entire manufacturing. Per Wall Street Journal, the iPhone-maker has been working to produce in-house chips to further distinguish its devices amid global slowdown of smartphone sales. It has employed engineers, including some from Intel. Late last year, Apple agreed to a $600 million deal to acquire 300 engineers and facilities from Dialog Semiconductor plc.

Intel was reportedly in search of a buyer for its modem business. And Apple comes across as one of the best bets given its long-standing customer-supplier relationship with Intel. Prior to Apple-Qualcomm’s six-year license agreement and a multi-year chipset supply agreement, Intel was the sole third-party modem supplier for the 2018 models of the iPhone.

In the past, Apple had gone for smaller acquisitions with the latest being the buying of self-driving startup Drive.ai. But with the slowdown in its iPhone business, the main moneymaker, the company needed to be open to bigger deals, per Wall Street Journal. It has substantial $113 billion of cash after debt as of Mar 30 (per WSJ), which gives it a leeway to crack a billion-dollar deal. Its largest deal so far remains the $2.6 billion acquisition of Beats Electronics LLC in 2014.

Why the Acquisitions & Agreements?

Probably, Apple seeks to bring its 5G technology online sooner than expected, which has led to Qualcomm agreements as well as the likely Intel deal. Along with many analysts, we too believe that integration of 5G technology into iPhones will result in a meaningful increase in upgrades. Apple could bring about 5G as soon as in 2020. So, one can expect a solid uptick in iPhone sales in the coming days.

ETF Impact

Both companies — Apple and Intel — are likely to benefit if the deal materializes. So, investors can bet on Apple-heavy or Intel-heavy ETFs. ETFs that invest meaningfully in Apple are iShares Dow Jones US Technology ETF IYW, Select Sector SPDR Technology ETF XLK, Vanguard Information Technology ETF VGT, Fidelity MSCI Information Technology Index ETF FTEC and Invesco QQQ QQQ (read: Microsoft's Stellar Results to Drive These ETFs Higher).

Semiconductor ETFs like VanEck Vectors Semiconductor ETF SMH, iShares PHLX Semiconductor ETF SOXX and Invesco Dynamic Semiconductors ETF PSI are heavy on Intel (read: Semiconductor ETFs: What Investors Need to Know).

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Click to get this free report Apple Inc. (AAPL) : Free Stock Analysis Report VanEck Vectors Semiconductor ETF (SMH): ETF Research Reports iShares PHLX Semiconductor ETF (SOXX): ETF Research Reports Vanguard Information Technology ETF (VGT): ETF Research Reports Fidelity MSCI Information Technology Index ETF (FTEC): ETF Research Reports Invesco Dynamic Semiconductors ETF (PSI): ETF Research Reports iShares U.S. Technology ETF (IYW): ETF Research Reports Technology Select Sector SPDR Fund (XLK): ETF Research Reports Invesco QQQ (QQQ): ETF Research Reports Intel Corporation (INTC) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report