Technology giant Apple (NASDAQ:AAPL) is sitting on a mountain of $250 billion in cash on its balance sheet, a majority of which management has promised to deploy over the next several years. That’s a tall order. Spending over $250 billion isn’t easy to do. So, how does a company do this? Buybacks, dividend, and acquisitions, all of which will benefit Apple stock if deployed correctly.

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Apple already has buybacks. They spent over $8 billion on share repurchases in the December quarter and intends to keep buying back shares in bulk. Apple also already has a dividend. They paid out nearly $4 billion in dividends in the December quarter, and that number will only go up over time.

But not much has happened on the acquisition front. As such, everyone thinks that the next big move for Apple, given its huge balance sheet and recent struggles from stalling out growth in the iPhone business, is a big acquisition.

When it comes M&A talk, one of the companies that keeps getting thrown around as an Apple acquisition target is Netflix (NASDAQ:NFLX).

That may seem far fetched. Apple makes phones. Netflix is a streaming service. The two business models are traditionally orthogonal. But, in an IoT dominated world where everything is becoming increasingly connected, a marriage of these two businesses actually makes a ton of sense, and could provide a big tailwind for Apple stock.

Indeed, a few weeks ago, I wrote “[t]he most obvious M&A use of Apple’s huge net cash balance is an all-in acquisition” of Netflix. More recently, J.P. Morgan wrote that Netflix is a “strategic fit” for Apple.

So, should Apple really buy Netflix? More important, will it actually happen?

Long story short, Apple should buy Netflix. But, it likely won’t happen, given numerous logistic, operational, and financial challenges.

Apple Stock and Netflix

Apple should 100% buy Netflix.

Apple is a great business, but it’s also a slow growth business. Some of this has to do with scale. It’s tough to grow quickly when you’re putting up $80 billion-plus revenue quarters. Some of it has to do with a lack of growth where it matters. Specifically, the company’s long time big growth driver (the iPhone) is starting to materially slow, and as it does, Apple’s total revenue growth trajectory is flattening.

An acquisition of Netflix would entirely change that dynamic for the better.

Netflix is a big growth company. Revenues and subscribers have consistently grown by over 20% over the past several years, and the company is now closing in on $5 billion revenue quarters.

More than that, Netflix has a huge moat in the secular growth streaming market thanks to its robust original content portfolio, meaning that this company projects to remain the leader in streaming for a lot longer.

That streaming market is just scratching the surface of its global potential as the number of streaming video on demand (SVOD) subscribers is expected to nearly double over the next several years.

All in all, Netflix is a 20%-plus grower that promises to be a 20%-grower for a lot longer. By itself, that is something that Apple could use.

But the synergies of an Apple-Netflix acquisition are much deeper than just a boost to the growth rate. Apple’s next leg of growth will come from its Services business, which is a series of largely subscription based, high gross margin software businesses that attempt to monetize the Apple mobile, desktop, and TV ecosystems (App Store, Apple Music, so on and so forth).

Netflix fits perfectly into this wheelhouse. It is a software business. The business model is subscription based. Gross margins are high. And, consumption is done through mobile, desktop, and TV interfaces. Thus, the Netflix business would fit seamlessly under Apple’s Services umbrella.

Further, Apple could presumably leverage ownership of Netflix to sell a lot more hardware. By controlling the Netflix platform, Apple would also control distribution of the Netflix platform. In theory, that means they could make it difficult to stream Netflix through non-Apple products, which would create an incentive for consumers to switch to Apple products.

Overall, there are plenty of synergies here. Yes, it would be costly. But, Apple can afford it, and it would set the company up for continued success over the next decade.

Why It Likely Won’t Happen

Although the deal should happen and would benefit both Apple stock and Netflix stock, it likely won’t happen. Here’s why:

• Cost. Apple historically doesn’t make big acquisitions. Their acquisition of Beats for $3 billion was considered huge. A bid for Netflix would presumably cost more than 60-times that. It would also almost entirely deplete Apple’s balance sheet of cash. As such, cost is a huge factor that will keep Apple from pulling the trigger.
• Management issues. Reed Hastings founded Netflix more than twenty years ago, and remains the CEO today. Founder CEOs normally don’t sell their company, especially after more than twenty years of running it. Plus, Netflix has had such huge success recently, that even if Hastings were willing to sell, the ask from Netflix would likely be far in excess of what Apple is willing to bid.
• Financial issues. Apple is a cash cow. They produce billions and billions of dollars in cash flow every year. Netflix is the exact opposite. They burn billions and billions of dollars in cash every year. Granted, Netflix’s cash flow is expected to improve. But, it’s tough to see Apple putting in $200 billion for a company that will further drain its cash resources over the next several years.

Bottom Line on An Apple-Netflix Merger

Apple should buy Netflix. It would provide a much needed boost to Apple’s growth trajectory, fit perfectly into the Apple Services wheelhouse, and create compelling cross-selling opportunities across the hardware business. Ultimately, it would drive Apple stock higher.

But, this acquisition likely won’t happen, given the cost of such a deal, and the management and financial issues associated with an Apple-Netflix tie-up. As such, investors shouldn’t bet on this. They should simply hope for it, but plan otherwise.

As of this writing, Luke Lango was long AAPL and NFLX.