Apple needs blockbuster acquisitions in gaming & video streaming to thrive, claims J.P. Mo...

Posted:
in AAPL Investors edited February 4
To boost Services revenue, Apple should use its cash hoard to try to buy video streaming giant Netflix or video game publisher Activision despite neither being for sale, says analysts with J.P. Morgan.

'Diablo Immortal,' an upcoming iOS game from Activision Blizzard, a publisher that could become a future acquisition target for Apple
'Diablo Immortal,' an upcoming iOS game from Activision Blizzard, a publisher that could become a future acquisition target for Apple


A note to investors written by J.P. Morgan staff and seen by AppleInsider points out that Apple is in possession of a large amount of cash -- approximately $130 billion of net cash according to its most recent quarterly results. The company is said to generate $45 billion in cash flow per year after dividends, giving it a growing war chest for future use.

At the same time, Apple has stated it aims to be net cash neutral in the long-term, though has yet to provide a roadmap for how it would accomplish this goal. There is already a stock buyback program underway, which reportedly bought $62.9 billion in the first half of 2018, with analysts suggesting investors aren't complaining over the matter.

J.P. Morgan suggests that, for the remainder of Apple's cash pile, it should "use its balance sheet strength to insulate the business against often-seen disruptions in the technology landscape, some of which Apple itself has driven in the past." By insulation, the analysts mean acquiring firms in fields of interest that could offer strategic value and increased growth opportunities, especially in areas leveraging Apple's existing Services arm.

The analysts believe there are three areas where Apple could channel funds, which could prove beneficial in different ways.

First, it is suggested video gaming has numerous synergies with Apple's existing operations, including the hundreds of millions of gaming-capable iOS devices, as well as opening Apple up to other mobile devices and consoles, depending on its acquisition. It would also help Apple leverage an industry rapidly transitioning to mobile," as well as allowing the hardware needs of high-end gaming to help promote an accelerated replacement cycle.

Among potential targets for acquisition brought up in reports, the analysts propose Activision Blizzard to be the "best strategic fit," with the major publisher working in practically every area of the gaming ecosystem. The Blizzard element is also historically favorable, as the firm previously strived to offer its gaming releases on macOS as well as Windows, and has entered the iOS realm in recent years with more mobile releases planned.

Recent rumors have suggested Apple is considering launching some form of gaming subscription service, one that could offer access to multiple paid iOS titles for a monthly fee. Such a move could help increase its App Store revenues, as well as promoting paid-for games and other titles in a market dominated by free-to-play games.

A second area of interest is the smart home speaker market, which Apple already competes within with its HomePod. Investments in this field could promote high engagement with customers, synergies in driving Apple Music services, and help bring the company closer to its rivals in the market from its "currently lagging" position.

Sonos is identified as a prime target for purchase by Apple, due to its position as a premium home speaker system "relative to Amazon Alexa and Google Home," has a loyal customer base, and a robust international presence.

The third sector is in video content, with Apple potentially leveraging the growth in content consumption on mobile devices, as well as its already established platform for distribution via Apple Music and the TV app, and opportunities for Apple to earn revenue from advertising in its position as a content aggregator.

Apple has reportedly heavily invested in its own original video content efforts, spending at least a billion dollars on the project, which is tipped to launch sometime this year. Current rumors suggest there could be a subscription service or that the content could be offered to iOS device owners for free via the TV app, alongside subscriptions for third-party content sources.

Apple's ideal acquisition for video is said by the analysts to be Netflix, arguably the biggest paid video-on-demand service in the world today. Even so, it is admitted by the analysts that such a purchase won't happen as "Netflix is unlikely to be a seller for a modest premium."

The suggested purchases are thought to be of help to Apple's Services arm, which has seen reliable growth year-after-year, accounting for approximately $40 billion of revenues for the full year of 2018. The headwinds of the smartphone industry, which has led to a contraction of growth for iPhone, "are likely to drive a need for Apple to accelerate its Services offering" to head off the slowdown "in a more appreciable manner," the analysts claim.

While having a claimed $175 billion at its disposal could "buy a lot of growth," Apple doesn't have a history of making large acquisitions, J.P. Morgan notes. Apple instead prefers for "bolt-on" acquisitions, with a focus on bring crucial hardware technology in-house, and has been a very successful strategy for the company so far.

So far, Apple's largest acquisition has been for Beats, which it paid $3 billion for in 2014, whereas the typical purchase by the company is in the region of hundreds of millions.

"Apple's track record on acquisitions has made a lot of investors question the willingness of the current management team to explore large acquisitions," J.P. Morgan adds. It goes on to note that the Beats purchase itself wasn't just for hardware, as it also highlighted Apple's appetite for its Beats Music product and a need to grow its Services revenue, at a time when iTunes faced competition from Spotify and Pandora.

Hardware purchases are still an option while Services-related products are a better deal, the analysts add, with the possibility of technology-based acquisitions able to "drive synergies with certain services offerings and drive accelerated pace of growth."

Along with Sonos and other home platforms, it is proposed health platforms could also be a target, with Peloton a likely candidate if Apple invests in that direction.
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Comments

  • Reply 1 of 36
    rob53rob53 Posts: 2,032member
    Who really cares what JP has to say? How much customer money have they gambled on AAPL? Are they hoping for growth to line their coffers or are they trying to short the stock? I also wonder if JP even uses any Apple products or services.
    AppleExposed
  • Reply 2 of 36
    jimh2jimh2 Posts: 141member
    I love it when people tell others how to spend their money. Nothing wrong with having lots of cash reserves.
  • Reply 3 of 36
    Apple maybe should have bought Netflix 4-5 years ago. Not now it’s too expensive. Also has anyone explained why Apple should be in original content or game subscription services? Everyone says to boost services revenue but that’s an end result not a reason in and of itself. The Watch is a perfect example of Apple’s excellence in hardware miniaturization and the quest to make computing more personal. Any health related endeavors are a logical extension of that and a natural fit with the Watch.

     With services the only narrative seems to be financial - i.e., Apple has lots of customers so it should find a way to make money off them on a recurring basis. And then from there people come up with all manner of things Apple could charge a monthly fee for. The latest is games. Yes games are incredibly popular on iOS but gaming isn’t really in Apple’s DNA.

    I think Apple was at its best when it started with the products and let the revenue and profits flow from making great products. Services seem to be completely the opposite - starting with the financials and working backwards to a product. I mean has anyone ever said Apple as a company and it’s culture would be perfectly suited to making original TV programming? No. What was said is Apple has lots of cash and needs something to spend it on and Apple has lots of customers we think they need to monetize. Again all financial trying to work backwards to a product. And with the current executive team not very good at explaining the “why” of products (see iPad Pro, HomePod) I’m skeptical on how successful they’ll be at selling these new services. I hope I’m wrong.
    edited February 4 gatorguyrobbyxblastdoorDAalsethpatchythepiraten2itivguy1983
  • Reply 4 of 36
    Investment bankers advise Apple to do M&A?

    The old Warren Buffett wisdom still applies: Don't ask the barber if you need a haircut
    beowulfschmidtAppleExposedStrangeDayspatchythepiratetmaysocalbriananantksundaram
  • Reply 5 of 36
    NINTENDO. NINTENDO. NINTENDO. NINTENDO. NINTENDO. 
    robbyxmike egglestonpatchythepiraterandominternetpersonn2itivguy1983
  • Reply 6 of 36
    Meanwhile AAPL quietly back to pre earnings downgrade s#!tstorm levels...
  • Reply 7 of 36
    I’d be more interested in seeing Apple buy AT&T. They would get multiple streaming services, content (WarnerMedia), traditional distribution, a cellular network (where they could push their own products), etc.
    zoetmb
  • Reply 8 of 36
    crowleycrowley Posts: 5,834member
    No it doesn’t, claims me.
  • Reply 9 of 36
    I can tell you right now, the chances of Apple buying out Activision are slim to none. 
    StrangeDays1983
  • Reply 10 of 36
    dm3dm3 Posts: 152member
    Agree with JPM's comments.

    Apple has huge cash horde. They could change industries. Instead they've wasted the money with financial engineering trying to prop up their own stock. They could have bought, or could buy, a video content company (not a good idea any more, but Apple is doing it anyway), they could buy Tesla to shake up the automotive industry, be a leader in EV & autonomous, and get a visionary as part of it. Breaking into the gaming market in a big way would be a good move. They have so much money they could really change the landscape. They could buy AMD or NVIDIA, make their own graphics cards better than anyone else in the industry. They could buy or have bought a cell company, an ISP. Lots of industries that have been hard for Apple to work with, Apple could just buy.

    Instead they're just tweaking products and raising prices. 
    edited February 4 bohler1983FutureWil
  • Reply 11 of 36
    mubailimubaili Posts: 389member
    Yea, Apple need to do it in the next 60 days or doom. Sounds familiar. The only thing Apple needs to do is to delight its customers. Anything else is secondary. So far I am very happy in Apple ecosystem. I do wish they could speed up a bit, especially address the low hang fruit and easy fixed pain points like the butterfly keyboard. 
    StrangeDaysAppleExposed
  • Reply 12 of 36
    mjtomlinmjtomlin Posts: 1,860member
    Said it before, I’ll say it again... The best fit for Apple would be to buy Sony... They’d get music, movies, tv shows, gaming, consumer electronics, plus a whole slew of relevant industries.

    Imagine Sony’s consumer and pro electronics and computers supporting Apple’s platforms.
    applejakes
  • Reply 13 of 36
    dm3 said:
    Agree with JPM's comments.

    Apple has huge cash horde. They could change industries. Instead they've wasted the money with financial engineering trying to prop up their own stock. They could have bought, or could buy, a video content company (not a good idea any more, but Apple is doing it anyway), they could buy Tesla to shake up the automotive industry, be a leader in EV & autonomous, and get a visionary as part of it. Breaking into the gaming market in a big way would be a good move. They have so much money they could really change the landscape. They could buy AMD or NVIDIA, make their own graphics cards better than anyone else in the industry. They could buy or have bought a cell company, an ISP. Lots of industries that have been hard for Apple to work with, Apple could just buy.

    Instead they're just tweaking products and raising prices. 
    I agree. Cloning Netflix isn’t changing industries. Though I wouldn’t want anything to do with Elon Musk. He’s a basket case. I wouldn’t want him anywhere near Apple.
    randominternetpersontmay1983
  • Reply 14 of 36
    FolioFolio Posts: 557member
    I’m surprised New Zealand didn’t make the JPM list. Nice climate. Reliable tourism. Great setting for films.
    rayborandominternetperson1983
  • Reply 15 of 36
    mobirdmobird Posts: 143member
    Buy Tidal. HomePod could use some love with higher quality stream. Tidal is a much better experience than Apple Music, I don't need DJ's which seems to be so important to Apple IMHO.
    edited February 4
  • Reply 16 of 36
    mobird said:
    Buy Tidal. HomePod could use some love with higher quality stream. Tidal is a much better experience than Apple Music, I don't need DJ's which seems to so important to Apple IMHO.
    Apple could equal Tidal’s streaming quality merely by flipping a switch.
    AppleExposedpatchythepiratetmayn2itivguy
  • Reply 17 of 36
    And with the current executive team not very good at explaining the “why” of products (see iPad Pro, HomePod) I’m skeptical on how successful they’ll be at selling these new services. I hope I’m wrong.
    If you don’t know why the iPad Pro exists, you don’t need one. It’s a very fast iPad and a continuation and refinement of the iPad form factor. If you don’t need a fast refresh display, color accuracy, Pencil support, etc, then you don’t need it. Likewise, HomePod is self explanatory—kickass sound in a small shelf speaker package. What more can they say? Narrative, smarrative. 
    AppleExposedroundaboutnown2itivguy
  • Reply 18 of 36
    Should Apple move into new markets to grow and if one of those new markets is the transportation market, there are some new things happening in the electric vehicle business that deserve notice.

    Apple could use this platform for their own electrics:
    https://electrek.co/2019/02/04/volkswagen-meb-electric-platform-automakers/

    And could Tesla possibly become a battery supplier to Apple for phones, computers and vehicles?
    https://www.teslarati.com/tesla-energy-ultracapacitor-battery-maxwell-technologies-acquisition/
  • Reply 19 of 36
    avon b7avon b7 Posts: 3,800member
    As has been seen many times before, acquiring multi-billion dollar companies doesn't always pay off.

    There is no need for Apple to buy Sonos. If it is commited to the smartspeaker market it will be able to carve out its own niche and the industry as a whole should be working on interoperability from a customer facing perspective. Apple would have to catch-up but it's no way near a mature market so there is room for growth.

    For an entrenched market such as video content creation and delivery, Apple completely missed the boat but it's presence in an overcrowded market will probably lead to a shake up on business models. Netflix is already available in Spain through a major carrier. Too many players usually leads to convergence but there could be anti trust hurdles to consider. If Apple just goes down the content creation path and lets others handle the delivery, it might be less of a problem but quality and appeal will be essential.

    Apple should have got into gaming decades ago and really screwed up by not producing its own content but games aren't like films and series which can hold more value over time. It could enter the gaming market at any time but once again quality and appeal (plus commitment) are vital.
  • Reply 20 of 36

    dm3 said:
    Agree with JPM's comments.

    Apple has huge cash horde. They could change industries. Instead they've wasted the money with financial engineering trying to prop up their own stock. They could have bought, or could buy, a video content company (not a good idea any more, but Apple is doing it anyway), they could buy Tesla to shake up the automotive industry, be a leader in EV & autonomous, and get a visionary as part of it. Breaking into the gaming market in a big way would be a good move. They have so much money they could really change the landscape. They could buy AMD or NVIDIA, make their own graphics cards better than anyone else in the industry. They could buy or have bought a cell company, an ISP. Lots of industries that have been hard for Apple to work with, Apple could just buy.

    Instead they're just tweaking products and raising prices. 
    Every idea is a great one when you’re spending someone else’s money. 

    Buy Tesla for Musk? lol
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