Why Apple Needs A Mega Acquisition To Keep Its Stock Rising

Facing flattening iPhone sales and with its shares down more than 25% from their 52-week high, Apple Inc. (AAPL) is facing rising pressure from investors and Wall Street to use its massive $130 billion in cash on hand for a major acquisition, per several analysts cited by Barron’s. Potential targets for the global iPhone maker include A24 Studio, Lions Gate (LGF.A), Viacom (VIAB), CBS (CBS), Sony Pictures, MGM Studios and Netflix (NFLX), analysts say. (see table below).

Wedbush analyst Daniel Ives echoed JPMorgan's sentiment. "Now is the time for Apple to rip off the Band-Aid and finally do significant content [mergers and acquisitions] with the landscape ripe," wrote Ives in a recent note per Business Insider. "Otherwise it will be a major strategic mistake that will haunt the company for years to come, as content is the rocket fuel in the services engine and currently missing in the portfolio."

Apple: Possible Takeover Targets

·     A24 Studios

·     Lions Gate

·     Viacom

·     CBS

·     Sony Pictures

·     MGM

·     Studios

·     Netflix

Source: Barron’s

Apple Aims To Be ‘Net-Cash Neutral’

JPMorgan analyst Samik Chatterjee wrote in a note this week that while Apple is internally ramping up the expansion of its services business, investors are holding out for inorganic acceleration - M&A - through leveraging its cash-laden balance sheet. In a letter last month, CEO Tim Cook indicated that the firm plans on being “net-cash neutral,” meaning that it must eventually find a use for its cash. 

Investors Want Deals

Apple is aggressively building its software and services businesses in order to wean itself off hardware sales, which remain its primary source of revenue. JPMorgan's Chatterjee indicates that an acquisition would accelerate the transformation and help the firm hedge against financial swings from a weaker iPhone market.

The JPMorgan analyst rates Apple at overweight with a $228 price target, implying a near 33% upside from current levels. In an earlier note, he indicated that Apple should look to targets in the video streaming, video-gaming and smart-home speaker markets. 

Wedbush's Ives indicates that Apple’s streaming business is capable of capturing 100 million subscribers in three to five years, adding $15 a share to the firm’s stock price, or about $70 billion in market cap. To be sure an aggressive M&A strategy goes against Apple’s DNA, which has historically been to do no big deals at all, noted Ives to Business Insider. But, he added, “the clock has stuck midnight for Cupertino."

Looking Ahead

Despite pressure from Wall Street for an Apple mega-deal, it’s important to note that an acquisition could end up creating new problems for the tech giant instead of solving them. Apple's share could fall if a deal is viewed as too pricey, and Apple would ultimately face the challenge of integrating a new company into its culture. To achieve major growth, Apple my need to weigh the risk of a headline deal compared to the risk of less exciting growth without one.