In a significant development, Qualcomm Inc. has inked a deal to supply modem chips for Apple Inc.’s iPhones for at least three more years, potentially removing a looming financial challenge for Qualcomm. This also suggests that Apple’s efforts to develop its own chips may be progressing more slowly than anticipated.
As a result of this announcement, Qualcomm’s stock witnessed a robust surge of approximately 4% on Monday.
Under the terms of the new agreement, Qualcomm will provide iPhones with SnapDragon 5G modem-RF systems in 2024, 2025, and 2026. While Apple has been actively working on its own systems since its acquisition of Intel Corp.’s smartphone modem business in 2019, the timeline for rolling out its own connectivity chip sets has faced repeated delays.
Executives from Qualcomm anticipate having only a 20% share of modems in the 2026 iPhone models. This target potentially marks the timeframe for Apple to begin incorporating its own modems. Notably, a similar three-year deal signed by the two companies in 2021 had the same 20% share expectation for the final year. Publicly, Qualcomm has stated that it is providing “a vast majority” of modems for the 2023 iPhones.
Qualcomm disclosed that the terms of this new agreement are “similar” to the previous three-year pact. Apple has been approached for confirmation and comment regarding this development, with the company expected to unveil its latest iPhone lineup at an event on Tuesday.
Bernstein analyst Stacy Rasgon views this multiyear deal as a positive signal for Qualcomm’s stock. Rasgon highlights that it underscores Apple’s challenges in developing modem technology, which is a common hurdle faced by many companies, and Qualcomm’s technological leadership in the field. Rasgon notes, “And the longer it takes, the harder it is likely to be as cellular technologies do not stand still.”
Evercore ISI analyst Matthew Prisco believes that this deal provides Qualcomm with a clearer path to drive an increase in earnings per share “into the next cyclical upturn.” Prisco estimates that the iPhone modem business could contribute $2 to $3 in annualized EPS for Qualcomm.
Earlier this year, Qualcomm’s CEO Cristiano Amon stated that they were not planning to provide any mobile chipsets to Apple in 2024. This statement raised concerns about a potential revenue loss for Qualcomm. Oppenheimer analysts had even suggested an eventual revenue loss of $10 billion for Qualcomm. As a result, Qualcomm’s shares had been under pressure as the prospect of losing billions in revenue from Apple loomed. Over the past year, Qualcomm’s stock had declined by 19.6%, in contrast to the S&P 500 index’s gain of 9.6%.
The Qualcomm-Apple saga began in 2017 with a high-profile legal battle when Apple sued Qualcomm, alleging exorbitant licensing fees. Qualcomm countersued, and the two companies ultimately settled in 2019. This settlement coincided with Intel’s struggle to produce reliable chips for Apple’s iPhone to support the latest 5G wireless technology, prompting Intel to shutter its modem business. Apple subsequently acquired Intel’s modem business.
Earlier this year, Bloomberg News reported that Apple was aiming to have 5G chipsets ready by 2024 or early 2025. This ongoing partnership between Qualcomm and Apple underscores the complexities of developing cutting-edge modem technology in the rapidly evolving world of wireless communication.