Apple Inc. (AAPL) stock is broken. Shares are off nearly 25% from their 2015 highs, and in mostly straightforward fashion. Anyone who bought into Apple thinking that the iPhone and other newer products like the Apple Watch were going to drive growth have been sorely disappointed.
It’s a stark contrast to Facebook Inc (FB), which has been in a barely interrupted uptrend since 2013. Shares are up 350% since June of that year, including market-obliterating gains of 40% over the past year.
In fact, ever since Facebook’s first day of trading back on May 18, 2012, Facebook has shot up 190%, outperforming Apple by nearly 155 percentage points. Apple isn’t even beating the S&P 500 (53%) in that time.
What happened?
Some answers point to the products — iPhone growth has stalled, and many complain that Apple’s new devices are merely evolutionary, not revolutionary.
Global Equities Research analyst Trip Chowdhry has a more unique and complex explanation — Apple CEO Tim Cook is “insane.” The analyst took issue with AAPL continuing to fund dividends and buying back shares of Apple stock, despite the fact that its previous efforts haven’t really driven shareholder value.
And that’s where Apple could take a cue from Facebook, which is using its cash the “right” way — by wowing the world via new products and gutsy acquisitions.
Facebook Stock Actually Benefits From M&A
Facebook has been a mergers and acquisitions machine for years. Among its bigger acquisitions have been Instagram ($1 billion in April 2012), WhatsApp ($19 billion in February 2014) and Oculus VR ($2 billion, March 2014).
Instagram is growing, and seems to be contributing something meaningful to Facebook. “Given how Facebook’s overall ARPU (average revenue per user) is growing, I suspect there’s an increasingly significant component of Instagram revenue in there,” said Jan Dawson, chief analyst for Jackdaw Research. WhatsApp still isn’t producing revenues, but it does have 1 billion users that Facebook can at least try to figure out how to monetize. And the Oculus Rift, as of January, was four months backordered.
Facebook has also made a series of smaller purchases, such as its $120 million acquisition of Israel-based Onavo, which Facebook turned into an R&D center.
To date, Apple’s highest-profile acquisition has been a $3 billion buyout of Beats Electronic. Ask Apple investors to name the company’s second- and third-largest acquisitions, and they might duck for the nearest Internet search tool.
It’s not for lack of cash. Apple generated operating cash flow of $27.5 billion during its most recent quarter and sits on a much-touted cash and investments pile of more than $215 billion.
Several Apple investors are quick to point out that it isn’t within Apple’s “culture” to pursue large acquisitions.
Well, maybe that same “culture” needs a refresh.
Apple can only refresh the iPhone so many times. It can only “re-invent” the iPad by making it a little bigger or a little smaller — and that help isn’t coming from core products. AAPL needs a shot in the arm, and if that isn’t coming from the creative minds in Cupertino, it needs to come from the outside.
Facebook ended its recent quarter with $18.4 billion in cash and marketable securities. Free cash flow for the quarter was a hefty $2.1 billion. Where are the cries for FB management to re-acquire some of its stock or start paying a quarterly dividend?
There are none. Investors know that the money is better spent working on growth.
Buy Something, Anything to Save Apple Stock
So, what could Apple buy if it actually wanted to make a splash?
Technically, given its cash hoard, AAPL could go after most publicly traded companies as long as they’re willing to listen in the first place.
Tesla Motors Inc (TSLA) would make sense in that the price is right — at $24 billion, Apple wouldn’t be paying much more than what Facebook did to get Oculus, WhatsApp and Instagram. Apple’s auto ambitions aren’t exactly a secret, and Tesla already has an existing infrastructure, actual cars, a fine-tuned retail sales network …
Yes, Musk almost sold out to Alphabet Inc (GOOG, GOOGL) a few years ago, but Tesla was in much more dire straits at the time. TSLA now is on solid footing, is producing both the Model S and the Model X and should be producing the Model III within the next year or so.
Besides, Elon Musk apparently doesn’t think much of Apple.
An opinion piece on Fortune suggested that Apple acquire Netflix, Inc. (NFLX), as its ambitions in the streaming video space has already been well-communicated to the investment community, but with no no clear path towards actually entering the market. At nearly $45 billion, NFLX would be a huge buyout to swallow — and to actually sell out, Netflix would probably command an enormous premium, so let’s say $60 billion. But again — it’s not like Apple doesn’t have the resources.
The Street has become accustomed to rumors that AAPL is eyeing an acquisition of GoPro Inc (GPRO) with rumors surfacing most recently in December 2015 and again in early January. The case for an acquisition of the action camera maker is even more compelling today at a deflated valuation.
Even at a 33% premium, Apple could dish out just $2 billion to acquire GoPro — and that would be a billion dollars less than what it took to acquire Beats.
Yes, GoPro’s business has been in decline, but that has driven down the value of GPRO and made it very digestible, at $1.5 billion. and is reflected in GPRO’s stock that has lost nearly 70% of its value over the past year. While the argument can be made that GPRO is attractive to AAPL at a lower valuation, it is more desirable following its acquisition of mobile app companies Stupeflix and Vemory.
Following the two acquisitions, GoPro made its business more attractive by offering consumers a more convenient tool to edit and share video, which erases a major bear thesis.
As of this writing, Jayson Derrick did not hold a position in any of the aforementioned securities.
