As many people know by now, Apple (AAPL) has about $76 billion in cash, short term investments, and long term investments on its balance sheet. That's a lot of firepower at the company's disposal. If you are curious of how that all breaks down, I've done that for you.
But with that much firepower, and those numbers surely to continue growing in the near future, you must think that Apple will use it at some point. Now, some people claim a dividend is best, but too much of a dividend might make some start to call Apple a value play. I don't see that happening. What about a buyback? Well, if Apple used all $28.5 billion of its cash and short term investments, it would only be able to buy back about 8% of its shares.
Over a matter of a few years, that would improve EPS and should increase the stock, but that cash would have no future benefits. Once it is spent, it would be gone. Some sort of acquisition seems the most logical, so here are some candidates I see as possible, in no specific order or probability of happening.
Netflix (NFLX): If Apple believes the future of the internet is content, this acquisition would make sense. Apple could integrate all of the content from Netflix into ITunes, and either charge a monthly rate or a pay per movie/show rate (like Amazon's (AMZN) pay per tv show rate). Apple would probably sell off the mail business, which most likely would not figure into its business plan. The real question here is would it make financial sense for Apple, could they cut enough costs? Netflix is expected to produce about $3.25 billion in revenues this year, but less than $250 million in net income. Since Netflix would probably fetch a price tag of $8 to $9 billion, Apple would need to really cut costs to shorten its payback period. I'm sure Apple would find a way to make it work.
Salesforce.com (CRM) or Rackspace Hosting (RAX): Apple could make a real push into the cloud computing space with either of these names, but it would come with a hefty price. Rackspace trades at a Forward P/E of 47, and Salesforce is at 70, so Apple would be making a huge upfront investment. With these names, Apple may almost wonder if it would be cheaper to do it in-house. Rackspace would cost $6 to $7 billion, and Salesforce would probably cost $20 billion or more. It would surely boost Apple's cloud presence, but would be more financially risky than the Netflix deal. Apple probably would be better off waiting for these valuations to come down a bit.
Interdigital (IDCC): Interdigital is the hot name in tech M&A right now as the company is currently going through an auction for a potential sale. The company is the latest in the race to acquire patents. The company has over 9,000 patents and at least that many more in current applications for new patents. Many of these patents are in high tech devices as the iPhone and Blackberry, so you can see why Apple might be interested. Interdigital currently trades at a market cap of about $2.2 billion, but a third of that is cash and short term investments.
The stock took a hit recently when a rumor came out that first round auction bids were in the $1 to $2 billion range. Interdigital believes its patents are more valuable than the pool that Apple and Microsoft (MSFT) acquired from Nortel for $4.5 billion. If you believe them, you would think a purchase price of $5 billion or more would be reasonable. That would imply a purchase price between $100 and $120, and with the stock currently at $48, the markets are a bit skeptical.
The company is only projected for $380 million in revenues in 2012, but about $125 million in net income, implying a forward P/E of 17. A $3 billion purchase price would imply a forward P/E of 24, a much better valuation than the names mentioned above. This would be a nice acquisition for Apple to protect its technologies going forward, but there's also a chance that like the Nortel deal, Apple may only acquire certain patents from the company. If that's the case, a billion or two deal would be a financial drop in the bucket for Apple, but might be a good long term defense of the company's products.
Eastman Kodak (EK): Along the same lines as Interdigital, Apple could acquire some or all of Kodak's patents. Again, this would be to protect its own technologies. There is a greater chance though with Eastman Kodak that it would be a consortium acquisition, like the Nortel deal, rather than a sole buyer for Interdigital. Patents are always valuable, and Eastman Kodak might want to sell out now while it still can.
TV names: Apple might eventually want to break into the television market, and it could potentially do that with an acquisition of Netflix. However, if it really wanted to manufacture Apple TVs, it probably would be best served by buying out a tv maker or at least a tv manufacturing part of an existing company. While I don't see an entire company they could acquire in this space, I do see relevant pieces that would be helpful in LG Display (LPL), Corning (GLW), and AU Optronics (AUO). I don't think Apple will get to the point where every electrical device in your house is made by the company, but TVs might be the next logical move.
Sprint (S): This is my bonus one for fun. I'm not entirely sure that this would be possible, or that they could even get regulatory approval for it. But if Apple were to acquire Sprint, it wouldn't need Verizon (VZ), AT&T (T), or any other carrier. It would have its own distribution network, and you'd have to go to Apple for it. It seems logical, but probably not possible. It's interesting to think about though, so I figured I should throw it out there.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.