Apple (NASDAQ:AAPL) has relied on chip giant Intel (NASDAQ:INTC) to supply it with processors for its Mac line of personal computers since 2006 after Apple famously transitioned from PowerPC chips to Intel's Core processors. Ten years after that, Intel was added as a cellular modem supplier for the iPhone 7 and iPhone 7 Plus.
In 2017, Apple released the Apple Watch Series 3. One of the key selling points of that product line was the addition of cellular-enabled options to the lineup.
"Apple Watch Series 3 with cellular allows [users] to stay connected, make calls, receive texts and more, even without an iPhone nearby," Apple's press release announcing the Apple Watch Series 3 read.
There were reports last year that Intel was set to supply cellular modems for the cellular-enabled versions of the Apple Watch Series 3, but a tear-down report of the device from TechInsights ultimately revealed that Qualcomm (NASDAQ:QCOM), not Intel, won that cellular modem spot.
Apple's latest Apple Watch Series 4 hasn't yet been torn down yet, but according to a user who goes by the handle "Longhorn," who has a good track record of digging out technical details of Apple products, the cellular version of the Apple Watch Series 4 uses an Intel-supplied cellular modem.
Apple Watch Series 4 cellular uses an Intel modem (IBIS SoC) ... with ARM instead of x86.— Longhorn (@never_released) September 15, 2018
Let's go over what this means for both Intel and Qualcomm.
Small win for Intel, small loss for Qualcomm
Apple doesn't break out Apple Watch shipments, but it doesn't take a great leap of faith to believe that the Apple Watch cellular modem deal simply isn't going to move the needle from a financial perspective for either Intel, which analysts expect to generate $69.55 billion in sales this year, or Qualcomm, which analysts say is on track to rake in $22.43 billion in revenue during its current fiscal year.
For some perspective, TF Securities analyst Ming-Chi Kuo recently predicted that Apple Watch shipments would hit 18 million units in 2018. In a legal complaint against Qualcomm, Apple said that "a baseband processor sells for around $10 to $20." Even if we assumed that a potential baseband provider received the midpoint of that range per baseband sold into the Apple Watch and every Apple Watch sold in 2018 shipped with a baseband, then the total market opportunity would be in the ballpark of $270 million -- extremely small relative to either Intel's or Qualcomm's current businesses.
Now consider that nowhere close to all of the Apple Watches sold in a given year are cellular-capable and it immediately becomes clear that the total baseband supply opportunity into a product like the Apple Watch is just a fraction of that hypothetical $270 million. (The opportunity would be smaller still if you assume that an Apple Watch-bound baseband might be cheaper than one designed for a smartphone.)
The point here is that Intel doesn't stand to gain much nor is Qualcomm set to lose much from Apple deciding to move the cellular-enabled versions of the Apple Watch from Qualcomm baseband processors to Intel-based ones.
Indeed, Intel winning the entirety of the modem orders for Apple's recently announced iPhones (something that Qualcomm told investors to expect back in July) should have a much bigger impact on both companies' financial performance than anything related to the Apple Watch could have for the foreseeable future.