Please ensure Javascript is enabled for purposes of website accessibility

How Much Could Apple Save by Ditching Intel?

By Evan Niu, CFA - Dec 5, 2012 at 7:15PM

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

This could be a textbook case of disruption in the making.

Over the years, there has been plenty of talk about Apple (AAPL 1.62%) ditching Intel (INTC -2.86%) for its Mac processors, just six years after Apple switched to Intel silicon in 2006. Apple has made dramatic improvements in its own ARM-based (ARMH) A-chips over the years, most notably with the custom "Swift" core found in the A6, made possible by Apple's instruction set license from ARM.

Source: Apple.

There are plenty of reasons why Apple may be interested in pursuing such a monstrous transition in the long term: increased vertical integration, cost savings, more control, product differentiation, and improved power efficiency, to name a few. The primary downsides would be a potential sacrifice in raw performance relative to Intel chips and the logistics of a major architecture transition for its entire software platform.

At what cost?
When it comes to the cost savings aspect of the debate, Nomura is offering up some thoughts. The analyst believes that such a switch could translate into bottom-line gains as high as $6.50 per share. With 940.7 million shares outstanding, that equates to about $6.1 billion in potential savings. For context, that would also be more than a 10% bump in the $58.92 in earnings per share that analysts are projecting for fiscal 2013.

Keep in mind that such a move would take many years, as there's no way that Apple could pull off such a major switch within the next 12 months, nor should it considering the current performance sacrifice.

A numbers game
Let's dig in a little bit further. The latest A6 found in the iPhone 5 is estimated to cost Apple approximately $17.50 per unit, which is the cost of manufacturing services from Samsung. That's up from the $15 estimate for the A5 as of October 2011, which is also fabricated at Samsung foundries. If you take a look at Intel's processor prices as of November 2012, you'll see that its latest chips cost far more.

For example, the beefiest 12-core Xeon X5675 found in this year's Mac Pro is priced at $1,440. A high-end quad-core i7-3820QM found in the fully loaded MacBook Pro goes for $568, and the ultra-low voltage dual-core i5-3427U found in 13-inch MacBook Airs can be had for $225. Obviously, Apple doesn't pay retail prices and uses its weight to get volume pricing, but it certainly pays much more than what it does for manufacturing services on its in-house A-chips.

Apple's costs would be more heavily weighted toward its more popular laptops like the MacBook Airs and entry-level MacBook Pros, but even if the company pays $350 per chip on average (a relatively conservative estimate), the cost savings on the 18.2 million Macs shipped last year if they had carried A6 processors instead could have theoretically totaled approximately $6 billion.

There are a couple things to note. While the A6 has made incredible performance gains in itself, they still don't compare to Intel processors in sheer horsepower. Also, the $17.50 cost per chip that Apple pays for manufacturing doesn't include its research and development costs for chip design, although we already know that Apple's R&D spending is generally quite efficient (just 2% of sales last year). It also doesn't include the licensing and royalty fees that Apple pays to ARM.

It's debatable whether Apple would pocket these potential cost savings or pass them along to consumers in the form of lower prices. Moving down in price would make Macs even more competitive with the Microsoft (MSFT 1.07%) Windows crowd, but investors also know how much Apple loves its margins.

Sea change
What's worse for Intel is that Nomura even thinks that if Apple successfully pulls off a switch to ARM, other PC OEMs might be tempted to follow suit in ditching Intel and further benefit the ARM army. The seeds for such a sea change are actually already now sown in the form of Windows RT, Microsoft's big push into supporting ARM-based chips in its latest version of Windows.

There are already ARM-based Windows RT tablets/laptops/convertibles just now hitting the market, like Dell's (NASDAQ: DELL) XPS 10 that carries a Qualcomm (NASDAQ: QCOM) Snapdragon or the Asus VivoTab RT with an NVIDIA (NASDAQ: NVDA) Tegra powering it. It's too early to know how consumers will vote, but PC OEMs could switch to ARM rather easily if Windows RT fares better than Windows 8.

Lessons learned
Intel has long been the processor king, particularly when it comes to performance, but students of The Innovator's Dilemma know that performance oversupply is the first sign of a shift in the basis of competition. Once the performance demands of the mainstream market are satisfied, the market will shift to competing on other dimensions like price or convenience.

Most average consumers don't need most of the sheer power of Intel's latest and greatest if their primary usage model is casual computing. They surely don't care about Intel's advantages in vertical integration and manufacturing prowess so long as their devices do what they need them to.

If we're witnessing a classic case of disruption as ARM invades from below, then Intel could be expected to retreat upmarket into a higher-margin professional market niche that does demand superior performance. This could be a textbook example of disruption unfolding before investors' eyes.

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.
AAPL
$138.93 (1.62%) $2.21
Intel Corporation Stock Quote
Intel Corporation
INTC
$36.34 (-2.86%) $-1.07
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$259.58 (1.07%) $2.75
ARM Holdings plc Stock Quote
ARM Holdings plc
ARMH

*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
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

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.