Apple's Reported Plan To Replace Intel Chips With Its Own Could Bring Savings, Says BofA

Following reports that Apple Inc. AAPL is preparing to manufacture the chips used in Mac computers in-house beginning in 2020, Bank of America Merrill Lynch examined the prospects and potential time frame for the planned production shift.

The Analyst

Analyst Wamsi Mohan reiterated a Buy rating on Apple with a $220 price target.

The Thesis

BofA's continued bullish stance is based on growth in the high-margin services business; a continued long-term opportunity in emerging markets; potential share gains from lower-end iPhones; a steadier iPhone 8/X cycle that drives higher selling prices and gross margins; tax benefits; and optionality in cash balance, Mohan said in a Monday note. 

The project to develop Mac chips in-house, codenamed "Kalamata," could help Apple by reducing its reliance on Intel Corporation INTC processor cycles, Mohan said. Apple could have more work to do to ensure that the chips developed internally match the performance characteristics required of laptop-grade processors, the analyst said. 

BofA sees a twofold benefit from Apple's chipmaking endeavor, Mohan said:

• Aggregating development across iOS and MacOS could lower R&D spend by potentially combining development teams and reducing time to market for new products and apps.
• Even if an in-house chip costs 2-3 times the cost of processors used currently on iPad, Mohan said savings could still be $40-$50 per unit. If the new chip is used in at least half of the 20 million Macs sold annually, costs could be trimmed by $500 million, potentially boosting earnings by 10 cents per share.

BofA forecast phased implementation, as its sees Apple using the first-generation of internally developed chips on lower end laptops and the subsequent generations on high-end desktops.

The Price Action

Apple shares have added about 16 percent over the past year.

Related Links:

Here's Why Apple Is Drexel's Top IT Pick For 2018

Bernstein ID's Apple Suppliers That Track iPhone Revenue Trends

Photo courtesy of Apple.