Qualcomm will make Apple's iPhone modems until 2026, and its stock surges

By Jeremy C. Owens

Apple is trying to develop its own modem chips after years-long legal fight with Qualcomm, but new deal suggests it will be at least three years before iPhones have house-made equipment

Qualcomm Inc. will supply modem chips for Apple Inc.'s iPhones for at least three more years, removing a financial pothole in Qualcomm's path and suggesting Apple's attempt to make its own chips is moving slower than expected.

Shares of Qualcomm (QCOM) jumped about 4% on Monday.

Qualcomm announced Monday morning that under a new deal with Apple (AAPL) it will supply iPhones with SnapDragon 5G modem-RF systems in 2024, 2025 and 2026. Apple has been developing its own systems since purchasing Intel Corp.'s (INTC)smartphone-modem business in 2019, but the target date for providing its own connectivity chip sets has continued to slip.

Qualcomm announced Monday that executives expect to have just a 20% share of modems in the 2026 models, suggesting that as a target for Apple to begin installing its own modems. But when the two companies signed a similar three-year deal in 2021, executives stated the same expectation -- a 20% share in the final year -- and have publicly said since the end of last year that Qualcomm is providing "a vast majority" of modems in 2023 iPhones.

Qualcomm announced that the terms of the new deal are "similar" to the previous three-year agreement. Apple was asked to confirm and for comment when the news was released Monday morning. The company is expected to show off its new lineup of iPhones at an event on Tuesday.

That Qualcomm and Apple inked a multiyear deal is an encouraging signal for the chip stock, according to Bernstein analyst Stacy Rasgon.

It "clearly demonstrates both AAPL's problems with developing the technology (which are not unique as numerous companies have failed at making modems) and Qualcomm's technological leadership in the space," Rasgon said in a note to clients. "And the longer it takes, the harder it is likely to be as cellular technologies do not stand still."

Evercore ISI analyst Matthew Prisco added that the deal "offers a much clearer runway" for Qualcomm to drive a reacceleration in earnings per share "into the next cyclical upturn." He estimated the iPhone modem business will contribute $2 to $3 in annualized EPS for Qualcomm.

For more: The iPhone 15 is coming -- everything to expect from Apple's big event

Qualcomm Chief Executive Cristiano Amon told CNBC earlier this year at a large event for the mobile industry that he was not planning to provide any of the mobile chip sets to Apple in 2024. When asked by an analyst in an August earnings call if there was an update to that assumption, Amon said, "We're not making any updates to our prior plans for 2024."

Analysts took that to mean Qualcomm still stood to lose a huge chunk of revenue beginning next year. Oppenheimer analysts wrote in August that Qualcomm management "reaffirmed expected loss of modem socket beginning w/iPhone 16 launch next year," and predicted an ultimate revenue revenue loss of $10 billion for Qualcomm.

Qualcomm shares have struggled as the end of billions in revenue from Apple appeared to be on the horizon. The stock has declined 19.6% in the past year, as the S&P 500 index SPX has gained 9.6%.

Qualcomm and Apple staged a massive legal battle beginning in 2017, when Apple sued claiming that the chip maker's licensing fees were too high, and Qualcomm countersued. The two settled in 2019, as Intel struggled to produce reliable chips needed by Apple to move the iPhone to the latest 5G wireless technology without Qualcomm. Intel shut down its modem business on the same day the settlement was announced, and it sold the business to Apple a few months later.

Bloomberg News reported earlier this year that Apple was aiming to have 5G chip sets ready by 2024 or early 2025.

Emily Bary contributed

-Jeremy C. Owens

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09-11-23 1849ET

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