The year 2018 has started off with the rumor mills churning out news about major mergers and acquisitions. Intel Corp. INTC is now rumored to show interest in Broadcom AVGO. Post President Donald Trump’s intervention into Broadcom-Qualcomm deal, chances of a possible merger has brightened up between the two big chip-makers.
Intel Corporation Price
Intel Corporation Price | Intel Corporation Quote
Intel carries a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Rationale Behind the Rumored Deal
Broadcom has been hogging the headlines of late with its hostile bid for Qualcomm. However, the deal has finally come to a conclusion, with President Trump prohibiting the proposed takeover on grounds of national security concerns. The rejection stems from Trump’s concern of conceding China the upper hand in 5G communications technology.
Intel was skeptical that a Broadcom-Qualcomm combination could have posed serious competitive threats to its growing data centric business. Reportedly, the second-largest chipmaker had been planning to launch a bid for Broadcom since last year, which, however it postponed due to the ongoing Brocade integration.
Further, Intel took a wait & watch policy after Broadcom announced the hostile bid for Qualcomm. We believe that Broadcom’s failed attempt to buy Qualcomm can now encourage Intel to make a bid as the acquisition willprovide its significant competitive advantage in the chip market.
Further, a significant portion of Broadcom’s revenues come from Apple AAPL, which contributed more than 10% of revenues in fiscal 2017. Hence, grabbing Broadcom will improve Intel’s foothold into Apple’s supplier chain.
We believe that this can be a major incentive for Intel to bid for Broadcom’s assets, which will improve its position in the mobile communications market.
3 Technology Stocks at Risk
The possibility of Intel acquiring Broadcomhas raised concerns among the chipmakers namely Skyworks Solutions SWKS, Qorvo QRVO and Micron Technology MU.
Let’s dig into the details on how these semiconductor companies will be hurt by Intel-Broadcom deal:
Firstly, Skyworks Solutions, a designer as well as a manufacturer of high performance analog and mixed signal semiconductors,stands to get hurt from Intel-Broadcom deal. This Zacks Rank #3 (Hold) stock is significantly dependent on Apple, which accounts for about 40% of Skyworks’ revenues.
Skyworks Solutions, Inc. Price
Skyworks Solutions, Inc. Price | Skyworks Solutions, Inc. Quote
Skyworks has won contracts in recent times from multiple Tier 1 original equipment manufacturers (OEM) including Apple. The company’s growing presence into Internet of Things (IoT), connected cars, and 5G are significant growth drivers.
However, Intel-Broadcom deal can put this ambition into jeopardy. The sheer size of the combined entity will put significant pricing pressure on Skyworks leading to declining margin profile.
Secondly, let’s gauge the impact of this possible deal on Qorvo. This Zacks Rank #4 (Sell) companyis a leading provider of core technologies and radio frequency (RF) solutions for mobile, infrastructure and aerospace/defense applications. A significant portion of Qorvo’s revenues come from a handful of customers including Apple and Huawei, which contributed 34% and 11% of its revenues, respectively, in fiscal 2017.
Qorvo, Inc. Price
Qorvo, Inc. Price | Qorvo, Inc. Quote
Qorvo’s BAW filters, antenna tuners, RF front end modules and envelope tracking power management solution were used in Huawei’s flagship Mate 10 device. Moreover, the company tested the industry’s first RF front end module addressing 5G standalone and 5G non-standalone requirements.
During the quarter, Qorvo was selected as a provider of front-end power amplifiers (PA) to Qualcomm for its Cellular Vehicle-to-Everything (C-V2X) Reference Design. This will help the company penetrate deeper into the automotive industry.
However, Broadcom’s Wireless Communications segment serves the smartphone market with similar products that include a broad variety of RF semiconductor devices, connectivity solutions and custom touch controllers is the closest competitor to Qorvo.
Hence, it’s obvious that if Intel acquires Broadcom, it will intensify the competition for Qorvo.
Lastly, Micron remains one of the outstanding performers in the semiconductor space. Notably, this Zacks Rank #2 is witnessing improved pricing as well as elevated demand for DRAM and NAND chips. Mobile Business Unit (“MBU”) which includes Micron’s DRAM, NAND Flash, and NOR Flash products that are sold to smartphone, feature phone, and tablet mobile-device manufacturers accounted for 22% of fiscal 2017 revenues. Moreover, Micron recently added Apple to its customer roster.
Micron Technology, Inc. Price
Micron Technology, Inc. Price | Micron Technology, Inc. Quote
If Intel buys Broadcom the combined strength will pose significant threat to Micron's position in the Flash-based products market. Further, the combination can help Intel grab share from the company in Apple’s supply chain base.
While Apple stands to gain from the deal, Skyworks, Qorvoand Micron could lose out if it goes through. This explains their opposing stands on the issue even as the fate of this rumored deal hangs in the balance.
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