Apple Stock Soars on Broadcom Deal. Here's What You Need to Know.

The market was abuzz this week with news that Apple (NASDAQ: AAPL) and Broadcom (NASDAQ: AVGO) renewed a deal for Apple to buy chips from Broadcom. While that's a clear win for Broadcom, Apple stock soared more than 4% in one day on the news, too. Here's what you need to know.

A long-term partnership

There weren't many details about the deal, which was announced in a Broadcom regulatory filing. This was the entire note: "Broadcom and Apple have agreed to expand their long-standing technology collaboration through 2031 by entering into new multi-year long-term agreements for Broadcom to develop and supply a range of custom ASIC silicon products for use in multiple generations of Apple products."

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The two companies have been collaborating for many years. At least as far back as 2019, Broadcom provided radio-frequency units to Apple, well before artificial intelligence (AI) was on the radar as a growth driver for semiconductor companies. In 2020, Apple and Broadcom inked a three-year deal for Broadcom to supply wireless components as Apple entered the 5G market, a business Broadcom was then focused on. Even then, Apple was looking into designing its own chips, and the deal was a reassurance for Broadcom, since Apple represented about 20% of its business at the time.

The deal was renewed in 2023 as Apple expanded its 5G launch and was part of a $430 billion commitment made to invest in U.S. companies over five years.

Staying in launch mode

The new deal is for a much longer period and is further reassurance for Broadcom shareholders that the company isn't losing one of its biggest clients.

But Apple investors think it's a great update, too. It implies that Apple is investing in Apple Intelligence, which is still in launch mode, and preparing for upgraded products and "multiple generations" throughout its enterprise.

It also secures Apple's commitment from Broadcom, whose ASICs, or application-specific integrated circuits, have become more valuable to tech companies because they're cheaper and faster for specific tasks. Broadcom's history as a connectivity and network component company, along with its newer chips that power AI, fits Apple's product lines like a glove. This is most pronounced for the iPhone, Apple's premier product, which accounts for about half of its total sales.

The announcement comes on the heels of Apple raising prices on many of its products due to skyrocketing memory costs, and the longer-term deal brings stability and may keep prices steadier.

Jennifer Saibil has positions in Apple. The Motley Fool has positions in and recommends Apple and Broadcom. The Motley Fool has a disclosure policy.