Why Apple Inc. Is Smart to Dump This Supplier

By Ashraf Eassa Markets Fool.com

Apple(NASDAQ: AAPL)recently forced supplier Imagination Technologies (NASDAQOTH: IGNMF) to disclose to its own investors that the former will no longer need to license technology from the latter. The shift will occurwithin the next 15 to 24 months.

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That obviously has some serious implications for Imagination, but it also gives us some insight into Apple's future A-series processors. Indeed, we now know that these chips will soon include Apple-designed graphics processors, rather than customized versions of Imagination Technologies' PowerVR graphics processors.

Although this is clearly bad for Imagination, which depends on Apple for its very survival, this is great news for Apple. Here are three reasons why.

Image source: Apple.

Apple's might applied to graphics

Imagination has built great graphics processor technology over the last several years. That technology has allowed Apple and its software partners (for example, game developers) to deliver best-in-class 3D graphics experiences with its iPad and iPhone products.

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However, while Apple has delivered great graphics processors in its iPhones, it hasn't delivered "world-beating" graphics processors, as it has in processor cores.

For example, AnandTech recently ran some performance tests comparing the graphics processor inside of the iPhone 7 Plus' A10 Fusion chip with the one inside of Qualcomm's (NASDAQ: QCOM) recently released Snapdragon 835 chip.

The Snapdragon 835's graphics processor edges out the A10's by almost 9% in the GFXBench T-Rex sub-test, and it wins by almost 10% in the 3D Mark Sling Shot 3.1 Extreme Unlimited graphics sub-test.

On the one hand, Apple's iPhone 7 Plus is quite impressive considering that the Snapdragon 835 isn't yet available to buy in any device (though the Galaxy S8/S8+, which feature the Snapdragon 835 in certain regions, are coming soon), while the iPhone 7 Plus has been available since September.

On the other hand, Apple's CPU technology -- which is completely in-house -- is at least a generation, if not several generations, ahead of the competition. In Geekbench 4, Apple's A9 chip -- first available in September 2015 -- delivers better per-core CPU performance than Qualcomm's Snapdragon 835 (the best available chip on Android). The current A10, which launched six months ago, blows the Snapdragon 835 away in this regard.

I suspect that, with its in-house efforts, Apple is aiming for an unequivocal leadership position in graphics technology.

Couldn't Apple just use a bigger Imagination processor?

The graphics processor inside of the Apple A10 is reportedly a six-core PowerVR Series 7XT (Plus?) design. The obvious question, then, is if Apple just wanted to stuff more graphics performance into its mobile chips, why not just use a larger configuration of Imagination's graphics technology, like what it does with its iPad chips?

I suspect that the answer is that Apple thinks that it can develop more power-efficient graphics cores. That is, for a given level of performance, Apple thinks its own designs can consume less power, or for a given level of power consumption, it thinks it can deliver more performance.

The more efficient the graphics cores, after all, the more of them Apple could conceivably stuff in its future A-series processors to ultimately boost performance without sacrificing on battery life.

Expect decisive leadership, coming to an iPhone near you

Imagination says that Apple claims that it will "no longer use [Imagination's] intellectual property in its new products in 15 months' to two years' time."

What this suggests, then, is that we could see a custom Apple graphics processor inside of an iPhone as soon as the follow-on to this year's iPhone 7s/7s Plus/8 (which should launch in roughly 17 months) or as late as, perhaps, a spring 2019 iPad refresh.

Although I expect Apple to deliver some very impressive graphics performance with this year's A11 chip -- likely leadership performance until, at least, the next Snapdragon chip -- I think Apple has the opportunity to really impress with the A12 chip and beyond.

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Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.