Apple Inc. (AAPL) Stock Has Zero Need for Netflix, Inc. (NFLX)

Advertisement

Apple Inc. (NASDAQ:AAPL) investors have found themselves in the middle of an M&A discussion they never planned on joining.

Two weeks ago, rumors of a Twitter Inc (NYSE:TWTR) acquisition started a chain reaction of M&A chatter. At the time, the debate was solely whether Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) or Salesforce.com, Inc. (NYSE:CRM) would be the one to pull the trigger. Apple stock holders didn’t plan on being part of the mix.

AAPL was pulled into the discussion … albeit it in a roundabout way.

Walt Disney Co (NYSE:DIS) was posed as a potential buyer of Twitter as well, though only a few days later the pros suggested Disney is actually more likely to acquire Netflix, Inc. (NASDAQ:NFLX) instead. (Reports out today say Disney’s out of the Twitter bidding, so those pros might just be right.)

The market wasn’t able to leave that speculation alone, though. Now Apple has been named as a potential suitor for Netflix, with the original discussion about Twitter’s bidder now being little more than a fading memory.

No one asked the question a few days ago, but Apple stock owners have to field it now: Should Apple acquire Netflix?

Some say yes. Bernstein analysts, however, answered with a pretty decisive “no.”

To Buy or Not to Buy?

The upsides of a union of Apple and Netflix aren’t tough to identify. Apple has been moving toward recurring revenue models and away from its reliance on the inconsistent revenue of device sales.

Case in point: In June, AAPL overhauled the way its app store presents downloads in a way that favors subscription-based apps. To that end, the launch of a subscription-based music service a little over a year ago is another foray into a recurring revenue business.

Bernstein even conceded:

“Perhaps the most intriguing consideration of Apple potentially owning Netflix is that it would add $8B to Apple’s services revenues (or 3-4% to total Apple revenues), and more importantly could be used creatively to help shift Apple’s transactional business model towards a subscription-based model. We believe AAPL could and should look to build a subscription offering of features and services that could be bundled with its hardware offerings, analogous to what Amazon does with Amazon Prime. Netflix (at a discounted price for only iPhone or iPad users who buy Apple hardware as a subscription) could be a key element of an attractive services bundle.”

And yet, such a pairing wouldn’t likely be all upside for AAPL stock.

For as many acquisitions as Apple has made and continues to make, it doesn’t make big ones. And it doesn’t do deals that require massive integration of unrelated business models.

Yes, the iTunes Store sells video goods. That’s not a booming aspect of the iTunes venue, however. And Apple doesn’t sell subscription-based video services in a sea of growing competition in that space. AAPL would need to learn the ropes of content acquisition — which can’t be easy ropes to learn — and it would be starting out well behind others in that market.

Bernstein added:

“An acquisition of Netflix would be highly out of character for Apple on many fronts – Apple historically has not done large deals; it does not purchase and run established businesses; the deal would in reality likely be 2-3% dilutive (in a cash transaction; much more so in a stock deal); and Apple more likely wants to build an OTTP content offering including live TV (sports, news), which could be a replacement for pay-TV, instead of (just) a Netflix-like, on-demand content offering.”

So what’s the savvy decision Apple could make to add to the value of Apple stock? Bernstein hit the nail on the head, saying:

“(We) believe Apple could get much of the benefit of a services offering with much less upfront risk by partnering with Netflix, rather than acquiring it. In fact, a partnership could be mutually beneficial. Directionally, we believe that Apple and Netflix could look to sell Netflix for $8 or $8.50 per month (vs. $10 currently) to “Apple Prime” users (i.e., those consumers who pay for their iPads or iPhones on a subscription basis). We suspect that the $1.5 to $2 reduction in monthly price could potentially be funded jointly by Apple and Netflix, particularly if it was a new customer acquisition tool for Netflix.”

Bottom Line for Apple Stock

Bear in mind that despite all the speculation surrounding a union of Apple and Netflix and what it may look like, AAPL hasn’t confirmed any interest. For that matter, neither has NFLX.

Then again, it wouldn’t be in either company’s best interest to tip their hands and let competitors get a leg up.

Whatever the case, owners of Apple stock may not want to get their hopes up if they were counting on an acquisition of Netflix. If AAPL wanted to get into the over-the-top television game, it would most likely revert back to its plans announced in early 2015. That is, unveiling an internet-based TV service that includes the much-needed network broadcasts. Those plans were kiboshed later last year. But the recent hiring of former Time Warner Cable executive Peter Stern hints Apple is more apt to do its own thing than Netflix’s thing.

That’s arguably a better long-term idea for Apple, though it may partially pull the rug out from underneath Netflix shares.

Bernstein concluded:

“Overall, we do not see a compelling rationale for Apple to acquire Netflix, and believe Apple will more likely partner or compete with Netflix than acquire it. That said, it is very hard to estimate its likelihood and potential impact on Netflix’s fundamentals. As a result, we do not believe the potential for a partnership or acquisition by Apple justifies owning NFLX.”

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/apple-inc-aapl-stock-netflix-nflx-bernstein/.

©2024 InvestorPlace Media, LLC