Apple Just Announced a Multibillion-Dollar Deal With Broadcom -- Here's What Investors Should Know

In early 2018, Apple (NASDAQ: AAPL) announced plans to invest $350 billion in the U.S. economy. At the time, the company said this set of investments would be concentrated on those areas where Apple could have the "greatest impact on job creation." These included direct employee hiring, spending and investment involving domestic manufacturers and suppliers, and fueling the "fast-growing app economy."

The tech giant later raised that commitment to $430 billion over five years, including a proposed campus in North Carolina and greater investment in 5G technology.

Apple just took another big step in fulfilling its pledge, striking a multiyear, multibillion-dollar deal with chipmaker Broadcom (NASDAQ: AVGO) to create components for its devices that will be made in the U.S.

Silicon wafer for manufacturing semiconductor of integrated circuit.

Image source: Getty Images.

A big focus on 5G

In a press release on Tuesday, Apple said it struck a major deal with Broadcom for a variety of 5G radio frequency components. The technology, which will be developed by Broadcom, will include Film Bulk Acoustic Resonator (FBAR) filters, which are precision electronic filters that help focus inbound and outbound wireless signals, while reducing interference, which ensures it transmits and receives only those communications intended for that specific device.

The agreement also covers a number of other "cutting-edge wireless connectivity components." Apple noted that the FBAR filters would be "designed and built in several key American manufacturing and technology hubs, including Fort Collins, Colorado, where Broadcom has a major facility." Apple said it already helps support 1,100 jobs at the plant and "the partnership will enable Broadcom to continue to invest in critical automation projects and upskilling with technicians and engineers."

A regulatory filing by Broadcom revealed the company had entered into two separate multiyear agreements with Apple, "for the supply of a range of specified high-performance RF and wireless components and modules for use in Apple products." The filing was mum as to the specific value of each deal.

Apple launched its 5G-enabled iPhone in 2020 and has since expanded the technology to other devices including the iPad Pro and Apple Watch.

Broadcom investors rejoice

This is welcome news for Broadcom shareholders, who have been justifiably concerned about the prospect of losing a large portion of its annual sales from the iPhone maker. In recent months, there have been multiple reports suggesting that Apple planned to part ways with Broadcom, replacing a number of Wi-Fi and Bluetooth processors in favor of chips of its own design.

The iPhone maker is reportedly Broadcom's largest single customer in its most recent fiscal year, representing roughly 20% of Broadcom's revenue, or about $7 billion. If the reports were true, it was expected to hit Broadcom's sales to the tune of $1 billion to $1.5 billion, according to estimates by AB Bernstein analyst Stacy Rasgon.

What it means for Apple

Like so many companies, Apple struggled with supply chain and logistics issues during the pandemic. Over the past couple of years, the company was hit by widespread product delays due to its heavy dependance on manufacturers in China and the concentration of its suppliers.

Since then, Apple has been working to restructure its supply chain to reduce its reliance on the country, after suffering a supply shortage of its signature iPhone during its crucial holiday season as well as longer-than-normal shipping delays. Apple has been expanding its manufacturing into new countries, including Vietnam, Malaysia, and India, to reduce this risk. Furthermore, Apple will be moving the production of some of its semiconductors to a new foundry in Arizona, being constructed by Taiwan Semiconductor Manufacturing.

While there's no way to quantify the deal for Apple, this is just another sign of the progress the company is making to reduce the risk of future supply chain disruptions.

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Danny Vena has positions in Apple. The Motley Fool has positions in and recommends Apple and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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