Please ensure Javascript is enabled for purposes of website accessibility

Apple Has the PWR

By Tim Beyers - Updated Apr 5, 2017 at 9:33PM

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

What's the endgame, Steve?

Leave it to Apple (Nasdaq: AAPL) to keep everyone guessing.

Late Tuesday, the Mac's daddy told Forbes that it had acquired chip designer P.A. Semi for $278 million in cash, according to the magazine's estimates. Apple won't say why it made the deal, or what role the 150-person chip company will have in the design of future products.

Theories to come, but first ...

We take you to the earnings channel
Let's talk numbers. Apple yesterday reported $1.16 a share on $7.51 billion in second-quarter revenue. Free cash flow equaled $970 million.

Macs starred in the quarter. Laptop revenue soared 58%, while desktops enjoyed a 48% gain. Total revenue from MacBooks, iMacs, and their iCousins checked in at $3.49 billion, or 46.5% of the quarter's overall top-line take. 

But you knew this was coming, right? Recent analyst reports say that Apple's share of the North American PC market once again exceeds 6%. (6.6%, according to Gartner, a vast improvement over last year's 5.2%.)

And the iPhone? Not precisely on track, but hardly off-track, either. Apple sold 1.7 million iPhones from January to March -- 8.3 million units short of CEO Steve Jobs' goal of 10 million sold before midnight Dec. 31. (Expect a 3G version to aid the effort.)

For the bears, there's the iPod. Revenue from the iconic player edged up 8% in the quarter. Unit sales rose just 1%. The good news? That disparity strongly suggests that iPod margins took a northward turn.

Finally, Apple did its best work on its home turf. Retail revenue improved by -- get this -- 74%. Foot traffic, meanwhile, was up more than 50%, according to comments from CFO Peter Oppenheimer reported in The Wall Street Journal. (Retail is the reason Foolish readers like you chose Apple as the best stock for 2008.)

Did I say $18.4 billion? Sorry, I meant $19.4 billion!
Not surprisingly, all that selling has fattened Apple's wallet. Cash and short-term investments are up $1 billion since I first suggested that the iEmpire consider buying Akamai (Nasdaq: AKAM), Netflix (Nasdaq: NFLX), or Sun Microsystems (Nasdaq: JAVA).

Alas, Steve ignored my advice altogether, choosing instead to buy P.A. Semi, whose designs -- ironically -- are based on the PowerPC platform that Apple ditched in 2005 to hook up with Intel (Nasdaq: INTC).

Huh? A chip maker? Talk about a weird combination. Oil and water. Red wine and fish. Felix and Oscar. Bill Maher and the Pope. Apple and ... chip design?

Yeah. As much of an odd couple as the Mac's daddy and P.A. Semi appear to be, history says we should've seen this coming. Apple, you see, has been in the chip business before.

Apple's chip history
In 1990, the iEmpire was among the original triumvirate providing funding for chip designer Advanced RISC Machines. We know this firm today as ARM Holdings. Among its earliest works, ARM created the brains for a quirky but failed PDA known as the Apple Newton.

Apple also was the "A" in the so-called AIM Alliance, in which the company joined with IBM (NYSE: IBM) and Motorola (NYSE: MOT) to produce the PowerPC processors on which a decade's worth of Macs were built, including the one my wife still uses today.

As for P.A. Semi, co-founder and CEO Dan Dobberpuhl was a lead designer for Digital Equipment's ultra-fast Alpha chip and StrongARM microprocessor.

Digital intended Alpha to be a server chip. But StrongARM, as you might guess, was a joint venture with ARM Holdings. Its low-power design was intended for PDAs, phones, and set-top boxes. Intel acquired the technology in 1997 in a legal settlement.

See the pattern emerging here? Apple has a history of investing in low-power chip designs that have paradigm-busting potential. P.A. Semi's team has a history of producing ... low-power chip designs with paradigm-busting potential.

That's certainly true of the company's PWRficient chip. The editors of trade magazine Electronic Design just said as much, when they named the processor one of their "Products of the Year" for 2007. PWRficient, the editors wrote, is "said to be the most power efficient in its class."


Intel on the outs?
So, to recap:

  • Apple has a history of teaming with or funding firms that supply low-power paradigm-busting chips, especially for new products.
  • P.A. Semi's team has experience creating efficient processors for handheld devices and set-top boxes.
  • PWRficient is a low-power paradigm-busting chip that has won industry acclaim.
  • Apple's most rebellious new products are the iPhone smartphone and Apple TV set-top box.

As such, I think it's ludicrous to assume that this week's deal for P.A. Semi signals the beginning of the end of Apple's relationship with Intel. Others in the industry have long shipped products with chips from different suppliers, IBM (i.e., PowerPC, AMD, and Intel designs) and Sun (i.e., SPARC, AMD, and Intel designs) notably.

That Apple would want to control the brains of its newest and most important products -- especially when the iEmpire hasn't settled on a consistent supplier for the guts of the iPod -- is to be expected. It's logical. And if Apple's ingenuity remains intact, it may also prove to be brilliant.

Apple and Netflix are Stock Advisor selections. Intel is an Inside Value pick. Akamai is a Rule Breakers recommendation. Get unfettered access to the research and recommendations of these market-beating services free for 30 days.

Fool contributor and Rule Breakers writer Tim Beyers owned shares of Akamai and IBM at the time of publication. For the Motley Fool's disclosure policy, an apple a day keeps the Street at bay.

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.
$172.03 (-1.22%) $-2.12
Netflix, Inc. Stock Quote
Netflix, Inc.
$236.77 (-3.43%) $-8.40
International Business Machines Corporation Stock Quote
International Business Machines Corporation
$137.94 (-0.81%) $-1.13
Intel Corporation Stock Quote
Intel Corporation
$35.47 (-2.02%) $0.73
Akamai Technologies, Inc. Stock Quote
Akamai Technologies, Inc.
$95.86 (-0.97%) $0.94
Motorola Solutions, Inc. Stock Quote
Motorola Solutions, Inc.
$253.72 (-0.98%) $-2.52

*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 08/19/2022.

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.