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These 2 Apple Suppliers Have Something in Common

By Ashraf Eassa - Nov 29, 2018 at 5:23PM

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Their wireless chip businesses are heavily dependent on a single customer.

Two of the most valuable publicly traded chip companies on the market today are Intel (INTC -2.86%), which commands a market capitalization of around $222 billion as of a recent check, and Broadcom (AVGO -1.64%), which the market values at just over $97 billion. 

Both of these companies are providers of key components in Apple's (AAPL 1.62%) iPhone line of smartphones. Intel sells cellular modems to Apple and became the sole source for such chips in the latest trio of iPhones. ( Intel also provides Apple with processors for its Mac computers.) Broadcom sells a range of components to Apple in support of the iPhone, including, but not limited to, Wi-Fi/Bluetooth combination chips as well as radio frequency (RF) chips.

An Intel XMM 8160 chip next to a penny in a size comparison, with the chip being smaller.

Image source: Intel.

While the fact that they are both iPhone suppliers is certainly something they have in common, the similarities with respect to the iPhone don't end there. Indeed, both companies' smartphone chip businesses are both heavily reliant on Apple. Allow me to explain.

Broadcom's Apple reliance

Broadcom as a whole is actually a solidly diversified business, with about 30.6% of its fiscal 2017 revenue coming from its wireless communications segment and the rest coming from its wired infrastructure, enterprise storage, and industrial and other segments. Sales of wireless chips are certainly important to the company, but they're by no means the company's only significant source of revenue and profits. 

However, if you dig a little bit deeper, the company said in its fiscal 2017 10-K filing that "aggregate sales to Apple, Inc., through all channels, accounted for more than 20% of our net revenue for fiscal year 2017..." 

If we assume that all of the business that Apple does with Broadcom is with the latter's wireless communications segment, then this would imply that more than 65% of Broadcom's wireless communications revenue came from Apple. 

Put another way: If Apple were to abandon Broadcom for iPhone components entirely, Broadcom as a whole would still be viable but there'd be serious doubt as to whether the company would be able to have a viable wireless business over the long term. 

Sound familiar?

Intel's cellular modem chip business is in a similar situation to Broadcom's. Sales of wireless chips represent just a small part of Intel's overall business -- the company doesn't break it out, but it's small enough that it's lumped into the "all other" portion of Intel's client computing group results, which itself was just 11.8% of that segment's revenue last quarter. Yet sales of cellular modem chips to Apple represent the vast majority of Intel's cellular modem business. 

No other smartphone vendor, to my knowledge, uses Intel's latest stand-alone LTE modems in their devices, as other smartphone makers rely on applications processors with integrated cellular baseband processors. Apple builds its own applications processors, but it has never shipped its own cellular modems, so it needs to use stand-alone modems from a third party. For this year's iPhones, that third party is exclusively Intel. 

Now, here's the thing. If Apple were to entirely dump Intel, it's hard to see how Intel could justify the substantial investments in research and development it makes to keep building cellular modem technology. So, Intel's cellular modem efforts hinge on Apple continuing to buy those modems. However, Intel itself would be fine, even if the loss of that revenue stream would deduct from the company's overall sales.

So, while both Broadcom and Intel are both significantly more than Apple suppliers, their respective smartphone-oriented chip businesses are critically dependent on Apple.

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Stocks Mentioned

Intel Corporation Stock Quote
Intel Corporation
INTC
$36.34 (-2.86%) $-1.07
Broadcom Limited Stock Quote
Broadcom Limited
AVGO
$477.84 (-1.64%) $-7.97
Apple Inc. Stock Quote
Apple Inc.
AAPL
$138.93 (1.62%) $2.21

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