We were all shocked to see shares in Imagination Technology (LSE: IMG) crash on 3 April, and at 106p today they’re currently down around 60%. That’s a big turnaround from the days when rumours were circulating that Apple might be interested in buying out the tiny chip designer.
Apple’s denial perhaps should have given us come clue as to what was to come, as the Californian giant precipitated the Imagination share price crash by announcing it is to stop using the company’s graphics processing units (GPUs) and will instead develop its own alternatives. Last year, royalties from Apple totalled around £60m and accounted for half of Imagination’s revenues.
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That will still continue for a short while as Imagination chips are used across Apple’s range of iPhones, iPads, TVs and watches, but over the next 15 months to two years it will dwindle to nothing — and without Apple’s cash, Imagination looks likely to turn quickly back into a lossmaking operation unless it can find alternative sources of revenue.
What are the options?
In its announcement, Imagination Technologies said it “believes that it would be extremely challenging to design a brand new GPU architecture from basics without infringing [Imagination’s] intellectual property rights“. And some observers think Imagination has good grounds for a legal battle.
The problem with that is legal action would be slow and expensive, and it’s Apple that has all the time and the money on its side — Imagination was shouldering £40.8m in net debt at its interim stage last October, and is in no position to finance a lengthy and expensive legal case.
No, a small tech company in a legal battle that would probably make the difference between life and death, well, that’s not an attractive investment scenario for me.
There are some, including the Financial Times, who seem think there could be life in the firm’s relationship with Apple based on its multitude of patents surrounding graphics processing, and that some sort of court-avoiding deal could be struck for the continuing use of some intellectual property.
Who else is there?
Failing that, the only alternative seems to be for Imagination to pin its hopes on expanding the rest of its user base. But the problem is, as explained in the company’s first-half results released in December, it is just emerging from a restructuring phase, and the desired shape of the company has surely been dictated by its reliance on Apple as its key partner.
There are certainly possibilities for major new sales channels, as Imagination said of its Mediatek Helio X30 technology that it “expects some of these devices to intersect with Google’s Daydream VR specification and enable further mass market untethered VR headsets“.
But that all sounds very speculative to me, and I can’t help feeling there could be a knock-on effect from the latest catastrophe — if Apple doesn’t want Imagination’s clever tech stuff, maybe others won’t be so keen to commit to it either?
The company is suffering from situations that are not of its own making, after a lot of hard work to get to this stage, and today I feel very sad over what’s happened.
But when it comes down to cold, hard investing, I’m afraid Imagination Technology shares are firmly in bargepole territory for me right now.