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Apple's Bet On 5G

Daniel Laboe

The next generation of smartphones are in the pipelines’ of all the major smartphone manufacturers with an emphasis on 5G technology. This new high-speed phone is anticipated to spur the smartphone industry out of its slump. Apple AAPL is making a big bet on 5G with a potentially $1 billion deal with Intel INTC in the works.

Apple wants to control as much of their next-generation iPhone’s development and production as possible. The firm is in the midst of late-stage talks with Intel to acquire its modem chip business, a move that would give Apple further vertical integration.

Apple just recently acquired $600 million worth of assets from Dialog Semiconductor last year, its second-largest recorded acquisition behind the $3 billion Beats deal in 2014. The assets acquired expanded Apple’s exposure to their battery-management chip production and development. Making it one step closer to creating the 5G iPhone completely inhouse.

Intel’s sale of its smartphone-modem chip business would be considered a win for the company. Intel’s smartphone segment has been losing roughly $1 billion annually and the firm has been looking for a buyer. Intel originally purchased the smartphone-modem business from Infineon IFNNY for $1.4 billion 8 years ago.

Apple has historically targeted a higher volume of smaller firms in its acquisition efforts oppose to larger purchases. The decline in iPhone sales, their largest topline driver, puts Apple in a bind to make quick changes and get in front of this slide. Larger acquisitions with operations that can quickly integrate themselves into a business make a more opportune investment than many smaller firms when timely changes are needed.

This purchase would include Intel patents and staff. Apple’s acquisition may not only improve its 5G technology but drive more licensing revenue with the new intellectual property ... if Apple decides to share. Apple’s licensing revenue is under the Services umbrella on the income statement.

5G

This vertical expansion is a big bet on 5G that Apple is praying it is right about. iPhone sales have been deteriorating, and Apple is in desperate need of a shift that will throw this business back into forward gear. 5G could make or break AAPL.

We have been hearing about 5G for some time now, but what is 5G and why will consumers be rushing to buy 5G smartphones? 5G will give users faster upload & download speeds, lower latency, meaning more responsive smartphones, and the ability to connect more devices. Consumers will be rushing to buy this technology because that’s this new generation’s nature. Millennials ‘need’ the most up-to-date technology, with improved speed expected to be a big enough innovation for consumers to realize they need a new phone.

It will still be several years until 5G is universally used. 5G will be a slow transition with new cell networks taking time to set up, so this kick-start in smartphone growth may not happen for a few years. 5G cell towers are starting to be built, and the network is available in a handful of cities as cell providers begin to adjust to the new demand.

Take Away

Apple has a massive stockpile of cash on its hands and is on the hunt for investments with a robust NPV. The company has been engaging in aggressive stock buybacks since 2012 to improve stockholders returns. The company is in the midst of a $175 billion stock repurchase program that they are trusting will curb AAPL’s reaction to the negative iPhone data.

AAPL has managed to have a stellar year thus far despite iPhone sales decline. The stock has shown investors 32% appreciation since the beginning of 2019, far outpacing the S&P 500. This growth can be partially attributed to the significant share repurchases.

Apple is reporting its Q2 earnings one week from today on July 30th. They are expecting a year-over-year EPS decline and flat sales figures. iPhone sales are expected to decline further and could experience their worst quarter in 2 years.


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