Apple's (AAPL 1.27%) annual Worldwide Developers Conference (WWDC) is underway for 2022, and the company has announced several new software enhancements for its users. One announcement in particular is of interest to Apple shareholders: the new M2 chip, an update to the M1 that launched a couple of years ago for iPads, Macs, and MacBooks.
Here's what you need to know as an investor.
Image source: Getty Images.
The "next-generation of Apple M-series silicon"
Apple has just released the M2 chip, the successor to the M1 chip that was announced at WWDC in June 2020. The new MacBook Air and MacBook Pro laptops will feature the M2 chip, with other laptops, desktops, and tablets featuring the new electronics components later. The new laptops will be released starting in July.
The M2 is a sizable leap in performance over the M1, which is now found throughout most of Apple's lineup of tablets, laptops, and computers. The M2 has 20 billion transistors, 25% more than in the M1. The M2 also packs 100 gigabytes per second of memory bandwidth, 50% more than the M1. Basically, the M2 offers better performance to power consumption than its predecessor and many competing processors do.
A basic understanding of the semiconductor business model
Apple isn't a semiconductor company, but it has brought an increasing amount of chip design in-house in recent years -- a move other tech giants have taken, including Amazon (AMZN -1.64%) and Google's Alphabet (GOOGL 0.55%) (GOOG 0.74%). Why would companies like Apple want in on the semiconductor business?
Semiconductor companies are essentially electrical engineering companies. Designing chips -- especially the most advanced circuitry used in high-end smartphones, tablets, computers, and data centers -- is one of the most complex engineering processes around. Once a design is complete, it's usually patented and becomes intellectual property (IP). From there, most semiconductor companies monetize their IP work in two basic stages: licensing and royalties.
Rather than purchase a finished chip, chip designs can be purchased on a license agreement. These are essentially blueprints for semiconductor circuitry, for a complete chip, or chips as part of a larger computing system. The purchase of these licenses allows a company to customize the chips to their particular needs. In the case of Apple, its M-series chips are based on designs from ARM Holdings, one of the largest chip licensors in the world -- and the company that Nvidia (NVDA -3.33%) attempted to acquire from ARM's current parent, Softbank (SFTB.Y 0.93%), last year.
The second phase of chip design monetization is a royalty agreement. This is a payment made whenever a chip is manufactured with an IP license in it. It's typically a percentage of the selling price of the chip -- or, in Apple's case, what an internally developed and used chip would have cost should it sell on the market. The royalty fees can be negotiated, especially for a large company like Apple that uses a massive amount of circuitry.
Apple's chip design business strategy
Besides the M2 and the M1 it is succeeding, Apple has been bringing an increasing amount of chip IP in-house. It's been customizing chips for its iPhones for years, and in 2019 it acquired Intel's (INTC 0.64%) smartphone modem business -- which it is using to end its longtime reliance on mobility chip leader Qualcomm (QCOM 1.41%).
For the consumer, Apple's custom silicon helps it produce best-in-class devices. Though this tech giant already generates nearly $400 billion in annual revenue, there's still a lot of market share up for grabs if it can woo users to its ecosystem of devices.
But this isn't just a story of rising sales. The final bill for tech IP licensing and royalty payments can get hefty for companies that make and sell a final product. By bringing design work and customization in-house, a lot of money can be saved for an operation like Apple that churns out tremendous volumes of hardware. This vertical integration of tech design and device sales has helped Apple become one of the most valuable companies on the planet. Rather than being burdened with rising fees, Apple can use its clout to negotiate favorable deals. The result is a tech hardware behemoth that generates lucrative operating profit margins in the upper-20% to low-30% range.
Returns for investors in dividends and buybacks
So what's the revamped M2 laptop chip to Apple investors? Continued slow but steady growth for Apple's business over the long term. More importantly, though, the M2 and Apple's expanding library of in-house chips can help it save money -- which translates into Apple's big returns of excess cash to shareholders by way of a dividend and share repurchases.
Through the first half of its 2022 fiscal year, Apple has paid out $3.62 in dividends per share, a 17.5% increase over the previous year, and spent $43 billion in share repurchases, about the same as through the first half of fiscal 2021. Developments like the M2 can help Apple further boost its payout to investors over time.
