Some say that apps are the focus for Apple Inc. (NASDAQ:AAPL) stock right now. When prospects for hardware device sales don’t look as rosy as before, Apple stock has to rely on something else. But while software and services revenues have been growing, there could be a much better place for the company to find growth—mergers and acquisitions.
Apple Stock: This Could Be Bigger Than the iPhone
Although Apple doesn’t often make high-profile announcements about its acquisitions, over the years, it has reportedly bought more than 70 companies. The goal is to integrate them into its existing projects. For instance, by acquiring music software and hardware company Emagic in 2002, Apple was able to use its software, “Logic Pro,” to create the popular “GarageBand” application.
Apple’s most expensive acquisition to date was Beats Electronics. In August 2014, the company spent $3.0 billion to acquire Beats and its subscription music streaming service, “Beats Music.” Then Apple launched its own music streaming service, “Apple Music.” In less than a year since launch, the service has amassed more than 13 million paying subscribers. (Source: “Apple Timothy Donald Cook on Q2 2016 Results – Earnings Call Transcript,” Seeking Alpha, April 26, 2016.)
For the most part, Apple has been acquiring smaller companies that have either personnel or technologies that could fit into its projects. This time, though, there might be a much bigger target.
You see, Apple caused big splashes in the music world with “iTunes” and it’s doing it again with Apple Music. However, the company is yet to make a big statement in video. Other tech giants—such as Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG)—have already established a strong presence in the video streaming business.
The fastest way for Apple to expand into video and catch up to its competitors is perhaps through another acquisition. A recent report by the Financial Times suggested that Apple might be interested in buying entertainment giant Time Warner Inc (NYSE:TWX). (Source: “Apple Executive Proposed Bid for Time Warner,” Financial Times, May 26, 2016.)
At the end of last year, Apple’s senior vice president of Internet software and services, Eddy Cue, had a meeting with Olaf Olafsson, Time Warner’s head of corporate strategy. Sources said that Eddy Cue proposed the idea of buying Time Warner, but that discussion “did not get beyond a preliminary stage.” (Source: Ibid.)
Another source said that Apple plans to increase its spending on original content to “several hundred million dollars a year.” And according to some bankers, the company has been “on the lookout for content assets for several months.”(Source: Ibid.)
Speaking of content, one cannot leave out the hottest stock in 2015—Netflix, Inc. (NASDAQ:NFLX). As the top gainer among all S&P 500 companies last year, Netflix’s on-demand video streaming platform now has more than 81 million worldwide subscribers. As its stock price took a beating lately, Netflix’s market cap sits at less than $40.0 billion, which is nearly 50% less compared to Time Warner.
However, as much as I like NFLX stock, Netflix probably won’t be on Apple’s shopping list. The reason is simple—Netflix is burning a lot of cash at the moment and would continue to do so as it further expands its content library. If Apple were to acquire a media company, it would most likely be one that’s already running a profitable business with economies of scale.
At the end of the day, don’t forget that Apple has a huge pile of cash—more than $216 billion last time it counted. While most of it is stored overseas, the giant cash hoard does give investors some hope that at some point, the company could return some of that money to AAPL stock shareholders.
However, I don’t think that raising dividends or accelerating its buyback program is the best way for Apple to spend its cash. At today’s prices, the company already has a 2.3% dividend yield and its board of directors has increased its share repurchase authorization to $175 billion, up from $140 billion. What could really help AAPL stock right now is not a higher yield or more buybacks, but better growth prospects.
The Bottom Line on Apple Stock
That’s why I believe acquisitions could play a key role in Apple’s future. Whether it’s in media or not, the acquiree would have an interesting future integrating with Apple’s one-billion-plus active device ecosystem. And that might even be a bigger catalyst for APPL stock than the next “iPhone.”