Apple Inc. (NASDAQ:AAPL) stock improved 10% in 2016, despite posting its first revenue decline since 2001. Last week, it emerged that Apple would cut iPhone 7 production 10% amid weakening sales. Colin Gillis of BGC Research noted that supply chain info should be taken “with a grain of salt,” but nonetheless Apple is approaching a period of seasonal weakness.
Apple increased its services revenue 24% to $6.3 billion a quarter last year. As hardware sales weaken, Apple will need to accelerate its transition to software and services, which don’t fluctuate as much. Apple could effect this by buying Sirius XM Holdings Inc. (NASDAQ:SIRI), which itself may buy Pandora Media Inc (NYSE:P).
Barron’s already suggested this. By buying Sirius and Pandora, Apple would increase its revenue from services, boost its position in connected car services and strengthen Apple Music against Spotify.
Apple, however, tends to avoid big purchases. People like to speculate about Apple buying everything from Netflix, Inc. (NASDAQ:NFLX) to Tesla Motors Inc (NASDAQ:TSLA), but Apple has shied away. Apple’s $3 billion purchase of Beats in 2014 was its biggest acquisition so far. Sirius holds a market cap of $21 billion, and may buy Pandora for $20 a share, or $4.5 billion.
And other things could get in the way of a deal.
Buying Sirius/Pandora Will Help Apple Increase Services Revenue and Growth
Services already makes up a substantial chunk of Apple’s revenue, at 13%. This is larger than Mac and iPad sales. But iPhone sales still account for 61% of Apple’s top line.
Increasing Apple’s revenue from services would reduce risk, since services revenue doesn’t swing as much as iPhone sales. Sirius sold $1.3 billion in the third quarter of 2016, with most of that revenue derived from services. Pandora’s revenue in that quarter amounted to $351.9 million.
This would represent a 25% increase in Apple’s revenue from services, increasing Apple’s growth and potentially boosting AAPL’s stock price.
It Strengthens Apple’s Position in Connected Cars
Although the details on Apple’s plans may be uncertain, AAPL stock wants to get into connected car business. Currently Apple offers CarPlay, which allows iPhone users to iOS in the car without touching their phones. Sirius holds a position here.
Sirius purchased the connected-vehicle division of Agero in 2013 for $530 million, getting into the software of the car. Now, the Sirius XM Guardian offers users features such as roadside assistance and remote vehicle start. And Sirius executives have dealt with the automotive business for years. Buying Sirius would help Apple move into the industry.
Sirius/Pandora Help AAPL Stock in Music Streaming
Currently, Apple is locked in a battle against Pandora, Spotify, and Amazon.com, Inc. (NASDAQ:AMZN) over music streaming. Apple Music’s subscriber count rose to 20 million in December. However, Pandora still dwarfs Apple Music, with 77.9 million monthly active users, with 4 million paying $4.99 a month for Pandora Plus.
Apple could move Pandora users over to Apple Music, like it did with Beats Music subscribers, or keep them separate and just enjoy the revenue stream while mining the user data.
Obstacles to Apple buying Sirius and Pandora
That said, some things stand in the way of Apple buying Sirius and Pandora. As mentioned before, Apple prefers organic growth, and has avoided big acquisitions.
And regulators might block a deal as well.
Most importantly, this buyout cannot happen without John Malone of Liberty Media Group (NASDAQ:LMCA) giving the go-ahead. Malone’s Liberty Media owns a 65% stake in Sirius, which it picked up in 2009 by loaning a troubled Sirius $530 million. This has paid off handsomely. Would they want to sell and secure this gain? In February 2016 Greg Maffei talked about Liberty growing its stake to 100%. Liberty tried to buy 100% of Sirius in 2014.
So Liberty would be loath to part with Sirius for anything less than a high premium.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.
