Breaking Down Apple Modem Chatter, Potential Impact on Qualcomm

There has been a decent amount of chatter lately about Apple AAPL continuing to work on its cellular modem that could be used in its iPhone, iPad and potentially other products as well. Those headlines explain some of the lingering pressure on our Qualcomm QCOM shares, but when we peer into things it appears the market is overreacting more than it should.

We say this because Apple has been toiling away with this part of its Apple Silicon efforts since 2019 when it acquired the majority of Intel’s INTC smartphone business. As we know, Apple has suffered more than a few setbacks, and earlier this year Apple extended its relationship with Qualcomm to use its 5G modems until at least 2027.

It’s no secret that Apple is continuing to develop its own 5G modem and recent speculation suggests Apple could introduce its modem in a forthcoming low-end iPhone SE model or a rumored iPhone 17 slim model. Let’s remember that, in the coming weeks, Apple will introduce its 2024 iPhone model: iPhone 16. Let’s also remember that the Apple rumor mill is rampant and device teardowns are far more reliable.

While it would make sense for Apple to start at the low end with its modem, that would be a different strategy than what we’ve seen with Apple Silicon and its other products, especially the iPhone Pro. It’s not exactly a secret that wireless modems are a challenging business, in part because they need to work globally across different environments and carrier networks. In other words, we doubt Apple would risk the majority of its iPhone revenue to a new chipset. That tells us that we could very well see Apple start with low-end iPhone models and eventually work its way up.

But there are also reasons to think Apple may need to extend its relationship with Qualcomm.

The reason is 6G.

South Korea is expected to launch its 6G network by the end of 2028 with the U.S., Taiwan and China to follow. The key here is that 6G modems will need to be backward-compatible with 5G and 4G, particularly as 6G networks are being built out. That will bring another layer of modem complexity, along with the number of RF bands, components and so forth. The number of RF bands in a 5G smartphone rose to 30 from 15 in a 4G one, and the number of filters, power amplifiers and so on also rose meaningfully. While Apple is a talented team, coordinating that on a global scale across more than 750 mobile operators can be quite a task. It’s also one that Qualcomm sorted out years ago.

Two other things we need to consider: While Apple is one of the largest smartphone vendors, clocking in at 16% market share in 2Q 2024 per Canalys, there is the other 84% of the market for Qualcomm to grow with. There is also the opportunity we’ve discussed for its Snapdragon chipsets in the AI-enabled PCs, a new market for the company and one that is expected to reach 205 million units by 2028, according to Canalys, from 100 million next year.

As Qualcomm makes inroads with PC vendors, leveraging its relationship with Microsoft MSFT, there is also the potential for greater adoption of cellular connectivity and modems in the notebook PC market. This year well under 10% of all notebook PCs are expected to ship with that connectivity.

And, as we’ve discussed, there are other opportunities in the auto and IoT markets.

So, while some may be reacting to headlines for something that may happen more than several quarters from now, we remain quite comfortable with this one-rated portfolio position.

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At the time of publication, TheStreet Pro Portfolio was long AAPL and QCOM.