There's been a lot of speculation recently about acquisitions in the tech space, primarily regarding Twitter (NYSE:TWTR) and Netflix (NASDAQ:NFLX). Shares of both companies saw a spike, with Netflix up almost 15% recently and Twitter surging nearly 40% before pulling back. With technology giant Apple (NASDAQ:AAPL) having the most financial flexibility to make acquisitions, Apple has been rumored at times to purchase both names. Today, I'll detail why that should not happen.
First of all, we all know Apple's acquisition history, which has mainly been to acquire small private companies. While management in recent quarters has seemed more open to larger deals, a purchase of Twitter or Netflix would seem way out of character. Twitter closed Friday with a market cap of roughly $14 billion, while Netflix closed at nearly $45 billion. As a result, take a look at the following valuations based on fiscal 2017 estimates for these names.
*Valuations based on fiscal 2017 estimates for Apple, calendar 2017 estimates for Netflix/Twitter.
**GAAP P/E for Apple and Netflix, non-GAAP for Twitter.
Those valuations are based on current prices, so just imagine how much higher they would be if Twitter got the $30 billion price tag it was looking for. Netflix would also likely get at least a 20% premium if it were to be acquired, making that a purchase of over $50 billion. Remember, Apple has less than $20 billion of cash inside the US, so deals of this size would either require another large debt offering, a stock component (unlikely given the buyback plan), or repatriation and a large tax bill.
At the moment, Apple is using cash flow and debt to buy a company at a much lower valuation each quarter, and that is itself. Apple can buy its own shares for less than 13 times expected earnings, as opposed to buying Twitter for say 70 times non-GAAP earnings (Twitter has GAAP losses), or Netflix for perhaps 150 times earnings. Netflix's miniscule earnings would barely boost Apple's bottom line, and Twitter is projected for just $310 million in revenue growth next year, a rounding error for Apple basically. Perhaps partnerships would be a better idea, like this Apple-Netflix scenario suggested by Bernstein's Tony Sacconaghi:
- Partner with Netflix. Sacconaghi likes this one best, seeing it as mutually beneficial. Apple gets the benefits of the Netflix service without the upfront risk; Netflix gets to grow its subscriber lists from Apple's high-value customer base.
If Apple is interested in acquiring content, it can easily do so for a fraction of the price. For just tens of millions of dollars, Apple can easily add to its Apple Music service, which recently hit 17 million paid subscribers. If this growth trajectory continues and the service is expanded in more countries, Apple Music might even have more annual revenues in a year or two than Twitter does.
I also believe that if the company wants to launch a TV service, partnerships with network or cable TV companies would cost much less. Apple could even strike deal(s) with major sporting leagues like Twitter has done with the NFL. All of this can be done for a small fraction of the cost it would take to buyout Netflix or Twitter.
Personally, I'd be a bigger fan of Apple making smaller, more targeted purchases like GoPro (NASDAQ:GPRO) or Fitbit (NYSE:FIT). This would allow Apple to get a bigger presence in wearables, drones, and camera technology. These two names, for instance, could probably provide just as much revenues in the next year or two as Twitter would, and they'd do so at a fraction of the cost.
Because of its large cash pile, Apple often gets rumored as a potential acquirer when any tech name is rumored to be on the block. If you're trying to drive the price up for a deal, it certainly makes sense to get the public believing Apple is involved. However, Netflix and Twitter don't fit in the technology giant's long running acquisition strategy, and Apple can buy its own shares back at a significantly lower valuation. If Apple is just trying to make a revenue grab, there are much better alternatives at much lower valuations. If the goal is to acquire content for its services like Apple Music, it can do so on its own without spending tens of billions.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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