Apple Announces Shift to Internal Chips

On June 22, Apple AAPL held its annual Worldwide Developers Conference with its typical slew of operating system updates across its bevy of devices. Our overall takeaway was that Apple used the event to showcase the refined user experience for its existing devices, versus a single massive innovation or new product. Perhaps the most interesting announcement was the long-rumored decision for Apple to design its own ARM-based chips for its Mac and MacBook PC products, thus replacing current supplier Intel. Given that Apple designs its own chips for its iPhone and iPad devices, we believe this move was inevitable. The transition will occur over the next two years, with initial Macs powered by Apple chips to be released by the end of 2020. While this move could be construed as damning to Intel’s INTC PC chip business, we estimate PC chip sales to Apple account for a low-single-digit percentage of Intel’s total revenue. For Apple, we expect the firm will enjoy some gross margin expansion in its Mac PC line in the coming years. We are maintaining our fair value estimates for both narrow-moat Apple ($240) and wide-moat Intel ($70).

Apple spent most of its keynote presentation highlighting software updates such as a language translation service to rival Google Translate, picture-in-picture mode for viewing video while accessing other iPhone apps (already available in Android devices), and iMessage updates that allow users to thread replies and mention people directly (similar to features in WhatsApp). To facilitate the transition to its ARM-based chips for its Macs, Apple announced a transition kit that includes a Mac Mini with an A12Z processor currently found in iPad Pros. All in, we think the shift to in-house chips will help Apple better enhance the user experience across its iPhone, iPad, and Mac franchises, while we don’t see any other PC OEM having the silicon design expertise to replicate Apple’s strategy.

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