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Apple reportedly drawn to Beats' streaming service; sell-side has its doubts

  • Bloomberg reports Apple (AAPL +1.3%) became interested in Beats after trying out its subscription streaming service, which has won praise for its personalization tech - it combines human curation with recommendation algorithms, and takes a user's mood/environment into account. The news service adds Apple plans to work with Beats to "improve the quality" of its headphones, which have a loyal following but also plenty of audiophile critics.
  • Billboard and the WSJ report Dr. Dre is set to join Jimmy Iovine (previous) as an Apple employee once the Beats deal goes down. Billboard adds the Beats co-founders could take the stage at Apple's June 2-6 WWDC developer conference.
  • Many on the sell-side aren't thrilled with the Beats reports. Uber-bull Gene Munster: "We are struggling to see the rationale behind this move. Beats would of course bring a world class brand in music to Apple, but Apple already has a world class brand." He speculates Apple's biggest motivation is adding Iovine to its ranks.
  • UBS' Steve Milunovich offers a more positive take: He thinks Apple might be paying less than 3x sales for a high-margin brand, and sees Beats' offerings strengthening Apple's streaming and wearables efforts. Milunovich also sees "philosophical compatibility" between Apple and Iovine.
  • BTIG's Walter Piecyk isn't a fan, but isn't too worried either. "$3 billion is less than 2% of the company’s cash and less than 10% its annual free cash flow ... we are more interested in further exploring our belief that rising upgrade rates in the [U.S.] could provide a nice tailwind for Apple in [2H14]."
Comments (38)
  • J Mintzmyer
    , contributor
    Comments (3658) | Send Message
     
    3x sales for a high-margin brand....

     

    Game, set, match.
    12 May, 03:38 PM Reply Like
  • littup
    , contributor
    Comments (388) | Send Message
     
    what do you mean game set match J Mintzmyer?

     

    I think 3x sales for a high margin brand ESPECIALLY with growth is a good buy!
    12 May, 03:42 PM Reply Like
  • u01bsb0
    , contributor
    Comments (631) | Send Message
     
    you don't watch tennis do you?
    12 May, 03:49 PM Reply Like
  • Jack Baker
    , contributor
    Comments (894) | Send Message
     
    Yes, that's what he means too, lol
    12 May, 04:57 PM Reply Like
  • WaveRider007
    , contributor
    Comments (397) | Send Message
     
    Point is, Apple sales are down because of competitors.
    12 May, 03:41 PM Reply Like
  • Doyle3000
    , contributor
    Comments (1308) | Send Message
     
    They get ragged on when they hoard cash, they get tortured when they spend it. It ain't easy being on top.

     

    Now if only these armchair quarterbacks would focus on some of the joke companies out there with huge market caps who don't actually make any money at all but enrich the management with stock options. That would be worth questioning each and every move that they made.
    12 May, 03:55 PM Reply Like
  • 22643611
    , contributor
    Comments (2101) | Send Message
     
    Market seems to like it
    12 May, 04:15 PM Reply Like
  • imac007
    , contributor
    Comments (494) | Send Message
     
    Apple has to sort out the foreign cash situation.
    Cash distribution through shares happens either directly through disbursements or indirectly through increasing share value.
    US cash must be used to distribute dividends or figure out ways to increase US profits while reducing overseas cash without paying taxes to repatriate cash.
    They can invest profits overseas into supply chain infrastructure to get preferred rates from suppliers therefore increasing margins on US sales.
    That is one way to decrease US expenses to increase US profits.
    They can reduce US R&D by investing in the R&D overseas both organically and through purchasing the needed expertise overseas.
    Share purchases can be made giving remaining shareholders a bigger piece of a bigger pie, US cash must be used to make the purchases.
    If cash is repatriated they would need to bring back over $900 in overseas cash to buy back one share after repatriated taxes are paid.
    To pay a dividend to shareholders with overseas cash. If dividend tax needs to be paid then the shareholder would only realize .55ยข for ever $1 brought back.
    The key is to invest cash into an entity that will generate US based profits from offshore dollars. Paying for acquisitions offshore into offshore financial institutions can do the trick. Taxes still must be paid but they are now from newly generated profits on the profits, not unfair multiple taxation.

     

    The government comes across as greedy and entitled.

     

    Think about it as an owner, since you are one as a shareholder. You sell a product overseas. The country you sell it in allows you to sell in their market place but on their terms. You must pay applicable taxes from sales, profits and payroll. They set up the market and are entitled to their share, fair enough. You sell a product stateside and do the same here, you pay the piper for the opportunity.

     

    The problem is you have already paid the piper for the opportunity and now the IRS stands with its hand out wanting 35% of what's left. To make it worse if I decide I want to take out some of whatever remains in the form of a dividend, the government wants 15% more.

     

    One catch is that acquisitions of this sort are limited to companies not publicly traded on the US market. The other is that it needs to be a company that sells significant product at a good margin in the US market. A company that has quadrupled its sales in three years in the high margin end of their niche definitely qualifies and I want them investing there. Organic growth can't address the overseas cash while inorganic growth can.
    12 May, 06:23 PM Reply Like
  • milehr
    , contributor
    Comments (490) | Send Message
     
    Too much money for that kind of a service. The primary beneficiaries of this deal would be Jimmy Bovine, Dr. Dreck, and Gargoyle Investment Group (highly "mangleable" names), but not Apple and its shareholders.
    12 May, 03:55 PM Reply Like
  • Jack Baker
    , contributor
    Comments (894) | Send Message
     
    I see. So the 3.2 billion is better left earning 1.5% with the other 150 billion? I think not.
    12 May, 04:59 PM Reply Like
  • DanoX
    , contributor
    Comments (2647) | Send Message
     
    Sounds like a Sun Tan problem.
    12 May, 05:03 PM Reply Like
  • Joe Tradesnizar
    , contributor
    Comments (15) | Send Message
     
    I don't understand this move at all. Why not invest money into iTunes radio or buy Spotify instead. Beats headphones are absolute garage and the fad will fade. It doesn't seem in line with what Apple offers now. It isn't a polished product.
    12 May, 03:55 PM Reply Like
  • Andreas Hopf
    , contributor
    Comments (8294) | Send Message
     
    Could not agree more with that. Apple has THX audio inventor heading audio dept. No need for an already tiring brand with max. 200k subscribers.
    13 May, 02:24 AM Reply Like
  • szeducate
    , contributor
    Comments (81) | Send Message
     
    Point is Facebook buys three companies worth 19B that have no earnings and highly overpaid but WS triumphs the brilliance of Mark Z. When Apple buys a brand that may open new avenues for it, it is seen as overpaying, no Apple-like, etc. Cook just can't win. However, we have seen that this guy probably knows what he is doing so we have to give him the benefit of the doubt.
    12 May, 03:56 PM Reply Like
  • DanoX
    , contributor
    Comments (2647) | Send Message
     
    Its the tan, uptight that those under 30 years don't like classic Rock maybe.

     

    Long AKG K240DF, and Sony MDR V-900 headphones
    12 May, 05:12 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (8526) | Send Message
     
    Can somebody answer this for me?

     

    Apple is paying such a pittance compared to its overall cash mountain for this brand.

     

    Why are people in such an uproar?!?!

     

    Didn't (FB) just pay over 5x this price in stock for a messaging service?
    12 May, 04:07 PM Reply Like
  • Jack Baker
    , contributor
    Comments (894) | Send Message
     
    YES. Thank you.
    12 May, 05:00 PM Reply Like
  • inside man 55
    , contributor
    Comments (763) | Send Message
     
    Market is biased against Apple.
    12 May, 05:05 PM Reply Like
  • DanoX
    , contributor
    Comments (2647) | Send Message
     
    Suntan?
    12 May, 05:31 PM Reply Like
  • skibimamex
    , contributor
    Comments (441) | Send Message
     
    I am not sure that you can justify/rationalize by any act of stupidity that FB may or may not have done to justify this move. I am neither favorable nor negative -- I just know that I am ignorant.

     

    I think there seems to be many who think the Beats products are poor quality and overpriced -- I for one, applaud that "branding power". What do you think Louis Vuiton or Burberry are? Perhaps some would claim that those are at least "high quality" luxury goods. I guess the real issue is whether Apple should invest in an adjunct brand to its core "Apple" brand. I frankly dont know until we have a better view of the strategy, and so dont know why we wouldnt just wait to hear the strategy articulated.

     

    The other school of thought seems to suggest that the price paid is too high. Since doesn't report publicly and we have zero information as to how its financial performance would benefit from being under Apple's stewardship, again it seems that assessment is simply pre-mature. similarly the rumored price is compared with what Carlysle paid for a minority interest in past year -- but a strategic buyer is always able in theory to pay more because of the strategic synergies that it may enjoy that a financial investor may not.

     

    My conclusion is we don't know anything yet to have any informed opinion on price, on rationale, on strategic synergies, on financial performance,... and just about everything else. So take a chill pill and just wait rather than speculating. In the meantime, $3B is a gnat on an elephant's butt in the case of financial impact to AAPL.

     

    12 May, 05:43 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (8526) | Send Message
     
    Frankly, Apple could have bought lottery tickets with the money and it would have ZERO effect on Apple's revenue, margins or net income.

     

    The worst that can happen is Apple makes back the cash in interest within 12 months.

     

    The reaction has been way overblown.
    12 May, 07:08 PM Reply Like
  • kolizacr@yahoo.com
    , contributor
    Comments (217) | Send Message
     
    At last a person on these Apple-focused boards who is rational.
    If we were Steve Jobs or MZ, we would also be running billion dollar companies.
    Give them credit for These people know a thing or two more than all of us put together.
    I have asked this again, did anyone here or in the whole universe of "professional" analysts ever see the potential of iPad, iphone or even iPod?
    Exactly, no one. So give it a rest or join that arrogant knows-it-all paid basher, Michael Blair.
    12 May, 07:58 PM Reply Like
  • AnInterestedInvestor
    , contributor
    Comments (86) | Send Message
     
    What craziness. Thus far its a rumor and although I may believe without wing Apple's motive for buying it how can anyone judge it. Oh I forgot, no matter what Apple does there is intense criticism.

     

    I for 1 give them far more credit than the analysts that have been more often than not been discredited by their advise. If the rumor is right it could be a purchase of a company that:

     

    Is a good investment when considering the pure ROI side.

     

    Provides them with respected leadership in the content/service side of the streaming business freeing other executives to focus on product innovations

     

    Now if they see more in it than that, which I believe they do, it's a very good investment. Not knowing that I can not see why all the press and negativity.

     

    Long Apple with growing confidence
    12 May, 04:11 PM Reply Like
  • Compute_This
    , contributor
    Comments (40) | Send Message
     
    To me, this just looks like Apple buying out the decent competition.
    12 May, 04:14 PM Reply Like
  • jkopf
    , contributor
    Comments (17) | Send Message
     
    If Beats makes junk headphones -- all show and no substance -- it's a lousy deal for Apple, and audiophiles think they're junk.
    12 May, 04:27 PM Reply Like
  • Jack Baker
    , contributor
    Comments (894) | Send Message
     
    Hmmm, Let's see. If Apple actually makes them top quality headphones (which they can easily do with scale) and then promotes them through the Apple retail stores (recently headed by merchandizing genius Angela Ahrendts of Burberry on 5/1), then they can drive top line sales of the headphones in a big way and drive tons of foot traffic into Apple stores (almost exclusively young people) and cross sell many other products. The margins expand further when Apple closes down all of the Beats retail stores as they are redundant and unnecessary. So, they are paying 3.2 billion for a company that they could easily get to 1 billion in PROFITS in 1-2 years. Then add the streaming business on top of that and you have an absolute slam dunk.

     

    Look, Apple does not spend its money foolishly. There are probably some valuable, scalable assets in the deal that no one is even pondering at this point on top of the hardware and streaming music.
    12 May, 05:10 PM Reply Like
  • DanoX
    , contributor
    Comments (2647) | Send Message
     
    Marketing doesn't to be a shortfall or MOG.

     

    https://mog.com
    https://mog.com/#!what
    http://bit.ly/1ntetlD
    12 May, 05:34 PM Reply Like
  • SoCalNative
    , contributor
    Comments (462) | Send Message
     
    Sounds like you have a problem with suntans whatever that means???
    12 May, 10:51 PM Reply Like
  • ellio lumbroso
    , contributor
    Comments (31) | Send Message
     
    Do not worry ! Tim Cook knows very well what he is doing .
    12 May, 04:29 PM Reply Like
  • rsbduff@gmail.com
    , contributor
    Comments (438) | Send Message
     
    A little late!

     

    To bad Tim Cook didn't buy beats last September when Carlyle bought half for $500 million. But, don't worry, "Tim Cook know very well what he is doing."

     

    Luckily for Apple, their CFO (Oppenheimer) is now on Goldman's board. He can brag about Goldman's big commission....(I would guess) on this deal.

     

    Can you imagine Steve Jobs paying three times as much as Carlyle did....seven months ago??

     

    RSBDuff (I know you're tired of hearing this insight
    12 May, 04:51 PM Reply Like
  • inside man 55
    , contributor
    Comments (763) | Send Message
     
    Can we suppose that 1) Carlyle got a heck of a deal from HTC and 2) perhaps the service has grown just a bit from December? If that is the case 3x what Carlyle bought their stake for makes more sense doesn't it.
    12 May, 05:12 PM Reply Like
  • Jack Baker
    , contributor
    Comments (894) | Send Message
     
    It's not too late and 3.2 billion is a rounding error on Apples money market account. The Beats asset will be worth over 10 billion 1 year after Apple gets its hands on it.
    12 May, 05:14 PM Reply Like
  • Smartnmale
    , contributor
    Comments (2) | Send Message
     
    This buy is a steal....great acquisition.
    12 May, 05:04 PM Reply Like
  • marcparrilli
    , contributor
    Comments (11) | Send Message
     
    has anybody thought of the possibility that Apple might want to use the headphones themselves as a remote or wireless streaming receiver, among other things?
    12 May, 05:04 PM Reply Like
  • niveoserenity
    , contributor
    Comments (15) | Send Message
     
    My guess at the rationale: Two year later, iPhones will be marketed as having the best music experience thanks to Beats. Apple EarPods is hailed as the best 30$ earbuds. Wireless EarPods introduced alongside new wearables. Tim Cook becomes best friends with Jimmy Iovine.
    12 May, 05:04 PM Reply Like
  • WaveRider007
    , contributor
    Comments (397) | Send Message
     
    Agreed, they are lower cost hardware appetizers on the Apple store menu to compensate higher cost hardware sales decrease. The company sale also came with a free lifetime subscription to Spotify.
    12 May, 06:09 PM Reply Like
  • Dukester
    , contributor
    Comments (79) | Send Message
     
    Has Apple actually announced it is buying Beats, or is this just a strong rumor?
    15 May, 09:50 PM Reply Like
  • jkopf
    , contributor
    Comments (17) | Send Message
     
    Nike pitches many of its products to the urban underclass, and Nike gets huge markups. Its T-shirts might sell for three bucks based on quality alone. Nike then adds a slick Swish logo and clever, rat-ta-tat-tat message: Just Do It. Nike gets these kids to drink its Kool-Aid and hand over an extra twenty bucks. Amazing. Tim Cook is on Nike's Board Of Directors. He must think Beats stuff can be Apple's Kool-Aid.
    16 May, 03:23 PM Reply Like
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