Please ensure Javascript is enabled for purposes of website accessibility

Why This Apple Inc. Supplier Conspiracy Theory Makes No Sense

By Ashraf Eassa - Updated May 22, 2017 at 9:16PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple is known for playing hardball with its suppliers, but it's unlikely that Apple plans to ditch Imagination Technologies as a supplier to be able to buy the company on the cheap.

Last month, longtime Apple (AAPL 0.36%) supplier Imagination Technologies (NASDAQOTH: IGNMF) disclosed that Apple no longer planned to use its graphics technology in future A-series applications processors, putting more than half of Imagination's revenue base at risk.

In place of Imagination Technologies' intellectual property, Apple apparently indicated to Imagination that it would be using its own homegrown graphics technology.

Apple's iPhone SE lineup in four colors: gold, silver, rose gold, and space gray.

Image source: Apple.

Given Imagination's high dependence on Apple, this news quite understandably sent Imagination's stock price plunging, losing more than half of its value on the day of the announcement.

This development has also led to some speculation that Apple's disclosures to Imagination, which led to Imagination's public investor disclosures, were simply a way for Apple to knock down Imagination's stock price and then scoop the company up on the cheap.

Here's why I don't buy that explanation.

Buying Imagination would be financially trivial for Apple

As of this writing, Imagination Technologies' market capitalization sits at approximately $370 million. Before the Apple-related disclosure, its market capitalization hovered around the $1 billion mark.

Sure, if Apple wanted to make an offer for Imagination Technologies today, it'd probably be able to scoop it up for a much lower price than it would have had to cough up if it had made an offer before Apple's disclosure, but the difference just wouldn't be significant to Apple.

Apple's net cash position is usually in the vicinity of $150 billion, and the company generated more than $45 billion in net income last year. If Apple really wanted to buy Imagination Technologies, then whether it paid $500 million or $1.5 billion wouldn't matter much, especially if Apple expected to see a substantial long-term return from having the company in-house.

No, I don't think Apple made the decision to invest substantially in staffing up multiple graphics processor teams and having those teams produce graphics processors for future iPhones because the company wanted a relatively insignificant discount on a longtime supplier.

This explanation makes more sense

I think it's far more likely that Apple simply believes it can build better faster, more power-efficient, and/or more compact graphics technologies than it thinks it will be able to source from Imagination in the years ahead. Furthermore, Apple can probably realize benefits from its tight hardware and software integration if it builds its own graphics processors.

For example, with control of iOS, the Metal API -- the way programmers can program the graphics processor in iOS -- and the underlying GPU architecture itself, Apple could conceivably add special hardware features to its custom graphics processors and expose those features to programmers through Metal well before the competition can ever hope to.

The loss of Apple as an Imagination Technologies customer is certainly a bummer for the latter, and while Apple is known for its aggressive supply-chain negotiation tactics, I don't think Apple shocked both Imagination and its stockholders in this manner simply to be able to buy Imagination on the cheap. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$142.07 (0.36%) $0.51

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/06/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.