Apple Reveals Custom-Made Chips, Ending Intel Relationship

On Monday, Apple (AAPL) announced a host of significant updates at its widely-anticipated annual Worldwide Developer Conference (WWDC). The most radical change with wider implications to Apple’s hardware was the introduction of its custom-made ARM chips to launch in its Mac-line by the end of 2020.

The transition from Intel (INTC) chips to Apple’s silicon powered chips closes a 15-year relationship with the chip-maker. Intel sold chips to Apple at $3.4 billion per year, amounting to less than 5% of Intel’s annual sales. The overall transition away from Intel is estimated to take Apple two years.

“When we make bold changes, it’s for one simple yet powerful reason: so we can make much better products,” Apple CEO Timothy Cook said during the pre-recorded video keynote announcing the change on Monday. “When we look ahead, we envision some amazing new products, and transitioning to our own custom silicon is what will enable us to bring them to life.”

Following the conference, Raymond James analyst Chris Caso summarized in a research note the cost savings and independence that will result in Apple’s switch to silicon. “The most important announcement in our view was confirmation of the upcoming transition to Apple silicon for Mac – transitioning away from Intel x86. We expect the change to negatively affect Intel revenue by $3-4 billion once the transition is complete.”

He added, “It’s also likely that Advanced Micro Devices (AMD) will eventually lose about 5 million units of graphics [chips] following this transition.” Caso has a Buy rating on the stock with a price target of $340 indicating downside potential of 8%.

Likewise, Evercore ISI’s Amit Daryanani has a Buy rating on the stock but with a price target of $375. In a brief note he stated, “There was no major ‘one more thing’ at the event, but in aggregate the announcements do make the ecosystem more robust and the shift to in-house silicon is a positive for margins.”

The analyst wrote, “We think it is encouraging that Apple continues to demonstrate its leading chip design capabilities as in-housing semi design remains key to product margin expansion.”

So far, Apple’s stock is up 26% year-to-date with 28 analysts assigning a Buy rating, 6 Hold, and 1 Sell, which altogether results in a consensus of a Strong Buy on TipRanks. The average analyst price target stands at $347 with a downside potential of 6%. (See Apple’s stock analysis on TipRanks)

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