Apple announces M2 chip: What investors need to know

important points

  • The M2 will be available on select MacBook models starting in July.
  • Apple’s in-house design work helps the company produce high-end hardware and save money in the long run.

appleThe annual Worldwide Developers Conference (NYSE:WKN) is in full swing for 2022, and the company has announced several new software improvements for its users. One announcement in particular is of particular interest to Apple shareholders: the new M2 chip, an update to the M1 that was introduced for iPads, Macs, and MacBooks a few years ago.

Here’s what you need to know as an investor.

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“The next generation of Apple M-Series Silicon”

Apple has just introduced the M2 chip, the successor to the M1 chip that was announced at WWDC in June 2020. The new laptops MacBook Air and MacBook Pro will be equipped with the M2 chip, and other laptops, desktops and tablets will later be equipped with the new electronic components. The new laptops will be launched in July.

The M2 is a huge jump in performance over the M1, which is now found in most Apple tablets, laptops, and computers. M2 contains 20 billion transistors, which is 25% more than M1. In addition, the M2 has a memory bandwidth of 100 Gbps, which is 50% more than the M1. Essentially, the M2 offers better performance/power consumption than its predecessor and many competing processors.

Basic understanding of the semiconductor business model

Apple may not be a semiconductor manufacturer, but it has developed more and more chips itself in recent years — a move other tech giants have loved. Amazon (Nasdaq: 906866-2.16%) and the alphabet (WKN: A14Y6H 0.05%) (WKN: A14Y6F -0.20%) Made. Why do companies like Apple want to get into the semiconductor business?

Semiconductor companies are basically electrical engineering companies. Developing chips—particularly the sophisticated circuits used in smartphones, tablets, computers, and high-end data centers—is one of the most complex engineering processes ever. Once a design is complete, it is usually patented and becomes an intellectual property (IP). Most semiconductor companies commercialize their intellectual property in two stages: licensing and royalties.

Instead of purchasing a finished chip, chip designs can be purchased through a license agreement. These are basic designs for semiconductor circuits, for an entire chip or for chips as part of a larger computer system. Purchasing these licenses allows the company to customize the chips according to their own needs. In the case of Apple, the M-series chipsets are based on designs by ARM Holdingsone of the largest licensed companies in the world – and the company that nvidia (NYSE: ARM) (NYSE: ARM) last year from the current parent company soft bank (NASDAQ: AAPL) I tried to take over.

The second stage of chip design monetization is a license agreement. This is a payment made whenever a chip containing an IP license is manufactured. Typically this is a percentage of the chip’s retail price – or, in Apple’s case, the price a chip designed and used internally would cost in the market if it were sold. License fees can be negotiated, especially for a large company like Apple that uses a large amount of circuits.

Apple’s business strategy in chip design

In addition to the subsequent M2 and M1, Apple has brought home more and more IP chips. The company has been developing its own chips for iPhone for years, and in 2019 it acquired the smartphone modem business Intel Corporation (NASDAQ: RNP 0.04%) has earned its longstanding reliance on the leading provider of mobility chips Qualcomm (NYSE: STZ 0.83%) to withdraw.

Here’s how Apple’s custom silicone helps make the best devices in the business. Although the tech giant already generates nearly $400 billion in annual revenue, it still has a lot of market share to gain if it succeeds in attracting users to its ecosystem.

But it’s not just about sales. The final bill for licensing technical intellectual property and paying royalties can be very high for companies that make and sell a finished product. When a company like Apple, which makes massive amounts of hardware, does the design and customization work in-house, it can save a lot of money. This vertical integration of technical design and hardware sales has helped Apple become one of the most valuable companies in the world. Instead of being burdened with increased fees, Apple can use its leverage to negotiate beneficial contracts. The result is a tech hardware giant that generates profitable profit margins of between 20% and 30%.

Returns to investors through dividends and repurchases

So what does the revamped M2 laptop chip bring to Apple investors? Slow but steady growth for Apple’s long-term business. More importantly, M2 and Apple’s growing library of internal chips can help the company save money — which returns excess cash to shareholders in the form of dividends and stock buybacks.

During the first half of fiscal 2022, Apple paid $3.62 per share, up 17.5% year-over-year, and spent $43 billion on share buybacks, roughly the same as in the first half of fiscal 2021. Developments like the M2 help Apple continue to increase its payments to investors over time.

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John Mackie, CEO of Whole Foods Market, an Amazon company, is a member of The Motley Fool’s Board of Directors. Susan Fry, CEO of Alphabet, is a member of The Motley Fool’s board of directors.

This article was written by Nicholas Rossolillo and published on Fool.com on 7/6/2022. It has been translated so our German readers can join the discussion.

Motley Fool owns shares in Alphabet (A shares), Alphabet (C), Amazon, Apple, Intel, Nvidia, Qualcomm and SoftBank Group. SoftBank Group’s Motley Fool recommends the following options: long 5.50 January 2023 calls on Intel, March 2023 long calls $120 on Apple, short January 2023 5.50 calls on Intel, and short March 2023 calls $130 on Apple.

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