Apple Inc. (NASDAQ:AAPL) is acquiring music recognition app Shazam for $400 million. The market seems to like the deal. AAPL stock rose nearly 2% after news of the deal broke.
The price bump makes some sense. Shazam will fit naturally and seamlessly into Apple Music. The underlying technology could also be integrated with Siri and other parts of the Apple ecosystem. Meanwhile, AAPL is acquiring Shazam at a huge discount compared to its most-recent, billion-dollar valuation.
But don’t get too bullish on AAPL as a result of this deal.
Shazam is an over-the-hump music platform that will help Apple Music level the playing field with Spotify, but not gain any material advantages. This acquisition will not likely have much impact in the broad music streaming world where the Swedish streaming service remains king.
What’s Positive About AAPL’s Acquisition of Shazam
Because they offer pretty much the same music selection, music streaming platforms (except for SoundCloud) have been largely commoditized, except for two critical features: new music discovery and user interface.
Shazam gives Apple Music a boost to discovering new music, an important component of music streaming platforms. Whether you are actively looking for new music, or just hit “play” on a suggested and AI-informed playlist, music discovery is a big part of the whole music streaming experience.
Spotify dominates this space and that’s largely why Spotify has such a firm grip on its market-leadership position.
But Shazam gives AAPL a strong technology to enhance music discovery. It is very likely that the discovery part of Apple Music becomes much smarter over the next 12 months.
Then, do the math. AAPL acquired Shazam at a significant, 60% discount to its $1 billion valuation. That means that Apple is buying Shazam’s 125-million-plus users for about $3.20 a piece. That is pretty wild. By comparison, Facebook, Inc. (NASDAQ:FB) is valued at over $250 per monthly user.
What’s Negative About AAPL’s Acquisition of Shazam
To be sure, enhanced music discovery capabilities and a discounted price tag don’t mean that this acquisition will move the needle for AAPL stock.
Source: Statista
For one, Shazam is an over-the-hump music platform. Two years ago, it was a $1 billion company contemplating an IPO. Then, the music streaming world changed from “identifying” to “discovering”, leaving Shazam — and $600 million of that valuation — in the dust.
Although AAPL is paying the right price for Shazam (a 60% discount appropriately reflects that Shazam missed the boat), investors shouldn’t view this as Apple acquiring a company with big growth prospects.
In fact, Apple is acquiring a company with very tepid growth prospects and will attempt to supercharge growth. That is a tall order, even for Apple.
Consider also that Spotify made a similar acquisition earlier this year, buying audio detection company startup the U.K.’s Sonalytic in March. With a few months headstart, Spotify eliminated any competitive advantage Apple could have had with Shazam as part of its ecosystem.
Bottom Line on AAPL Stock
Still, acquiring Shazam for a mere $400 million is the right thing for AAPL to do. (And with $261 billion in cash and marketable securities, it’s a rounding error.) I expect enhanced music discovery capabilities at Apple Music to act as a tailwind for user growth over the next several months.
But the magnitude of that tailwind will be muted by the fact that Apple Music’s music discovery capabilities will likely still lag Spotify’s capabilities. Spotify has long been the better platform for music discovery. That won’t change anytime soon because both platforms are pacing each other implementing audio detection technology.
All in all, then, I don’t see any reason for this acquisition to move the needle on AAPL stock, particularly with the shares dancing around all-time highs. I still remain bearish on AAPL stock into 2018 as expectations for super-charged iPhone growth into perpetuity begin to unwind.
As of this writing, Luke Lango was long FB.
