What Will Happen When Apple Cuts Off Intel?

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There was a lot of speculation before the release of Apple’s (NASDAQ: AAPL) iPhone 5 that Intel (NASDAQ: INTC) might make processors for this line of products; but with the launch, we saw the introduction of a custom-made processor for the iPhone created by Apple. The question is, what does this move implicate?

First, by introducing a custom CPU, Apple sent a clear message to every chipmaker that it’s striving to cut down the number of players in its iPhone manufacturing space.

The second thought, I should say, might actually be of concern for Intel (and every other player who is trying to enter the market). Will Apple shun Intel from the MacBook line of products? The answer is clear once we look into why Apple replaced the ARM chipsets with its own custom CPU.

ARM Holdings (NASDAQ: ARMH) is particularly slow at releasing new chips. In fact, between 2007 and 2010 ARM managed to release only 2 designs: the Cortex A9 and Cortex A15. This means if Apple was to rely on ARM, it would be left with no option but to reuse the same processor in subsequent products before introducing new technology. In spite of this, ARM’s stock is performing well. However, if you are planning to buy this stock now, I would recommend you think twice. Why? I feel this stock is overpriced. The PE ratio for this stock has sky rocketed; it's about 59.60. This high PE ratio is a direct result of ARM’s share appreciation.

ARM genuinely doesn't have the resources necessary to develop a product specific chip set, hence they resort to create a "one size fits all" processor; unfortunately, Apple needs a product-specific processor. It makes a lot of sense for Apple to make its own processor with competition building in the smartphone sector. Apple can maintain its margins if its processors are created internally.

But all of this has to do with the iPhone; what about Intel and the possibility of Apple creating its own processor for MacBook?

Intel's operations are light years ahead of any other processor manufacturer, and no company dares to claim that it's better than Intel in terms of their manufacturing ability. The quality of Intel based processors is excellent. So, does Apple really need to try and beat Intel at what it does best? A lot of you would say no—but not me!

In recent times, quality isn't what gives a product the “umph” factor, and no company knows that better than Apple. Apple could simply beef up its iPad processor and use it in the MacBook; I'm pretty sure that it won't be the best processor out there, but it will definitely do the job!

Let's assume Apple drops Intel from its next Mac release; how is this going to affect Intel?

According to Intel, Apple only accounts for less than 10% of its sales; meanwhile, Apple registered sales of about 4-5 million Macs in the last several quarters. This means that without Apple, Intel will lose between $4B to $5B. Honestly, a $5B deficit is a huge figure (about 10% of Intel’s revenue), but not huge enough to bring down Intel as Intel earns close to $50B a year.

This $5B loss is a figure that is calculated without assuming the growth of Apple as a company. Now, once Apple starts growing in terms of market shares in the PC space, Intel will start losing more revenue.

On a concluding note, I feel that if Apple switches to custom processors, Intel might run into quite a lot of problems. And if the switch does happen, I’d really get skeptical about Intel!

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ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Intel. Motley Fool newsletter services recommend Apple and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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