In news that flew somewhat under-the-radar as markets were surging to all-time highs, global internet giant Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) agreed to acquire struggling wearable maker Fitbit (NYSE:FIT) in early November for $2.1 billion, or about $7.35 per share.
There are two reads from this. One, Alphabet is serious about competing with Apple (NASDAQ:AAPL) in the consumer technology hardware world, and sees Fitbit as an appropriate complement to its existing smartphone and smart home businesses. Two, there’s a lot of money out there right now that could come back into play pretty soon in the M&A market, as corporate cash reserves are near record highs and recent cash accumulation could turn into cash spend as global economic growth prospects pick up with trade tensions easing.
I will focus on the latter implication. Specifically, I’m going to look at beaten up stocks to buy that could catch a bid as money comes back into the M&A market over the next few quarters.
After all, let’s face it — Alphabet saved Fitbit shareholders. Two months ago, FIT stock was trading hands at an all-time low price tag of $3. Shares have more than doubled since then, thanks to the Alphabet buyout offer.
Which beaten-up companies could follow in Fitbit’s footsteps and be stocks to buy sooner than later? Let’s take a deeper look.
Stocks to Buy That Could Be Saved By An Acquisition: Care.com (CRCM)
Shares of caregiver software platform Care.com (NYSE:CRCM) have lost more than half of their value since a scathing Wall Street Journal report released back in May criticized the company’s caregiver vetting process (or lack thereof). In the caregiver world, reputation is everything. So, once Care.com’s reputation got hit hard by the WSJ report, the company’s growth trajectory flattened out, as the volume of families and caregivers rushing to join the platform slowed.
Now, CRCM stock sits more than 50% off its 2019 highs, and trades at what is essentially an all-time-low forward EV-to-EBITDA multiple.
But, at these depressed levels, Care.com is exploring various strategic options to maximize shareholder return. One of those options is a potential sale of the company.
Who would buy Care.com?
Maybe IAC, the global internet giant that owns various digital marketplaces across a variety of industries. Care.com would fit into their digital marketplace wheelhouse, and give the company exposure to the secular growth caregiver industry. Or, Amazon could pull the trigger here, and throw Care.com services into its suite of perks that Amazon Prime members get.
Will it happen? Perhaps. Care.com is a still a growth company, with defensible attributes in a secular growth market. The stock is dirt cheap. That’s a healthy combination that should attract serious M&A interest.
Potential Suitors: Facebook (NASDAQ:FB), Amazon, Apple, Alphabet
According to The Information, Alphabet wasn’t the only one who was interested in buying Fitbit. Facebook (NASDAQ:FB) held talks to potentially buy Fitbit, too. The implication? Big tech giants are starting to see the upside in creating an ecosystem of consumer tech hardware products, because Apple is showing them that you can leverage that hardware ecosystem to create a huge software business with tons of high-margin, recurring revenue streams.
That’s why Fitbit got acquired. It’s also why GoPro (NASDAQ:GPRO) might get acquired.
For Facebook, the acquisition makes the most sense. The company is the farthest behind of the Big 4 in terms of hardware production. Its only other existing hardware products, Oculus and Portal, are both video-oriented products, so they could have synergies with GoPro cameras. Further, the content produced through GoPro cameras could be used to help boost Facebook Watch’s original content slate.
Will Facebook acquire GoPro? Probably not. Could they? Easily. The logic makes sense, and at $600 million, buying GoPro would be little more than a rounding error for Facebook.
Potential Suitors: Facebook, Amazon, Apple, Alphabet
Staying in this mind frame that Big Tech companies are aggressively looking to build out their smart product ecosystems, consumer robotics leader iRobot (NASDAQ:IRBT) could fetch a bid from Facebook, Amazon, Apple or Alphabet over the next few quarters.
iRobot makes robotic vacuum cleaners, pool cleaners and lawnmowers (coming soon). These all fall under the umbrella of smart home products. As smart home products, they naturally have synergies with other smart home products, like artificial intelligence voice assistants. Imagine telling your Google Home or Alexa to have the Roomba vacuum the living room, or have the Terra mow the lawn.
It’s seamless. It’s natural. And, it’s a big reason why one of these Big Tech companies could put out a bid for iRobot.
All four of them have voice assistants. Facebook has Portal. Amazon has Alexa. Apple has Apple Home. Alphabet has Google Home. Differentiation between the four is minimal, and in any way these companies can differentiate their voice assistants, they have to. Acquiring iRobot and implementing exclusive integrations is one way to do so.
The big idea? Thanks to a big push from Big Tech to build out robust, all-in-one smart product ecosystems, struggling IRBT stock could get saved in 2020 by a big bid from Facebook, Amazon, Apple or Alphabet.
Rite Aid (RAD)
Specialty pharmacy retailer Rite Aid (NYSE:RAD) has struggled over the past several years, thanks to rising competition from the likes of Amazon, Walgreens and CVS. Now, the very companies that pushed Rite Aid to the brink of bankruptcy, could save the company.
Consider this. Amazon recently partnered with Rite Aid, adding the pharmacy retailer to its delivery network so that Amazon Prime members could pick up their Amazon.com orders from Rite Aid locations. This is part of a broader push by Amazon to branch into offline retail and improve delivery logistics. If the partnership goes well, Amazon could very well just buy out Rite Aid, take all those locations and turn them into full-time fulfillment centers. At the same time, a Rite Aid acquisition would give Amazon a big boost in launching its own pharmacy unit, which has long been a running goal of the company.
Also, consider that Walgreens and CVS are both feeling the pinch from Amazon encroaching on their territory. They know that Amazon could get momentum in the pharmacy market by acquiring Rite Aid. So, either one of them could acquire Rite Aid simply as a preventive action to keep Amazon away from the pharmacy market.
Big picture — Rite Aid could be in the middle of a bidding war between Amazon and Walgreens/CVS. Note the emphasis on could. I don’t think any of these companies will make a bid for Rite Aid — that’s a lot of debt to inherit for a lack of visible long-term upside — but there is a definitely a chance here that a bidding war does prop up beaten-up RAD stock.
Under Armour (UAA)
Athletic apparel maker Under Armour (NSYE:UAA) has been the eye-sore of an otherwise red-hot, secular growth athletic apparel market for the past several years. During that stretch, while the likes of Nike and Adidas have leveraged favorable consumption trends to power their revenues, profits and stock prices to all-time high levels, Under Armour has struggled to even grow. Revenues have been flattish. Margins have been down. UAA stock has slumped.
This slump appears to be getting worse. The growth trajectory here remains flat. Margins are still depressed. And now, there are United States Department of Justice and U.S. Securities and Exchange Commission probes into Under Armour’s accounting practices, as investigators believe that Under Armour may have shifted its numbers around to artificially inflate results.
Despite all these negatives, Under Armour is still one of the top five preferred and most known brands in the red-hot athletic apparel market. They have been so for a long time, and they will remain so for the foreseeable future. Because of this, Under Armour could be a compelling acquisition target amid recent weakness.
Who would pull the trigger? Perhaps Amazon, who could buy Under Armour to finally burst into the athletic apparel market, something the company has wanted to do for a long time. Maybe Nike, who would buy Under Armour to help them in their global fight with Adidas. Or, perhaps Adidas, who would buy Under Armour to help fight against Nike.
Will it happen? Unlikely. There’s too much noise surrounding Under Armour at present for a suitor to approach. But, if the noise clears up and the stock remains depressed, that’s when UAA could start to draw serious M&A interest.
As of this writing, Luke Lango was long FB and NKE.