Why Apple Rumor Is Bad News For Tesla Investors

| About: Tesla Motors (TSLA)

Tesla (NASDAQ:TSLA) is a revolutionary company, but there's no denying the fact that at the moment, the stock is overpriced. Tesla's stock price has outpaced its business growth. The stock has appreciated nearly 70% in the last three months and it hit new high after The San Francisco Chronicle reported that Adrian Perica, Apple's (NASDAQ:AAPL) M&A head, had a meeting with Tesla's CEO, Elon Musk. This report gave rise to the speculation that Apple is interested in acquiring Tesla.

Acquisition rumors can boost the share price of any company; however, when the speculation fails to materialize, the stock starts falling at a rapid pace. For instance, back in 2010, reports suggested that Apple was interested in buying Nuance Communications (NASDAQ:NUAN), which resulted in over 85% increase in Nuance's share price. But, when the rumors started fading away, Nuance dropped back to its pre-rumor value.

Many investors have started bidding up Tesla because of the Apple acquisition rumors; however, I think there's no chance of this happening. Consequently, I think investors should ignore the buzz and not buy Tesla based on this rumor. Let's take a look at why this tie-up will never happen.

Tesla Is Too Expensive

Tesla's share price has been growing consistently and it the automaker now has a market cap of almost $25 billion. Assuming Elon Musk decides to sell Tesla, I am pretty sure he will ask for a lot more than $25 billion. Tesla has great momentum and analysts are expecting the company's earnings to increase from 0.64 to 1.59. Thus, it's highly unlikely that Musk will sell Tesla for anything under $30 billion. And given that the company recently sanctioned $14 billion share buyback program, I think it will avoid shelling out another $30 billion on acquiring a car manufacturer.

I'm not saying Apple can't buy Tesla, I'm just implying that it doesn't make sense for Apple to use such a large chuck of its cash reserve in buying a company which doesn't supplement its existing business. Historically, Apple has shied away from doing hefty M&A. Instead, the tech giant prefers to grow from within and save its cash. This is evident by the fact that Apple has never acquired a billion dollar company. While peers like Google and Yahoo! have spent billions on acquisitions, Apple's most expensive acquisition stands at $404 million. So, I think it doesn't make sense to assume Apple will spend over $30 billion in acquiring Tesla.

Saturation Doesn't Mean Apple Will Acquire Tesla

With iPhone's sales saturating, Apple will be looking at other opportunities to grow. This has further fueled the acquisition speculation, but there is no viable proof to back it up. I'm sure if Apple was looking into acquiring a car making company, it would have been hiring professionals with expertise in this field; however, there's no such job listing on the company's website. Instead, the company was looking to hire employees with medical background. Apple published a job listing seeking physiologists and engineers to run tests related to health and fitness data. Though the listing has now been removed, a screenshot is available.

This listing has given rise to the speculation that the company is looking to develop a fitness-focused wearable gadget, or "iWatch". iWatch fits the bill perfectly as Apple it will not branch out to any other sector or acquire another company. Apple hasn't launched a new product category in over two years, but it's obvious that the company loves to focus on homegrown products. Thus, it's evident that Apple will prefer spending money on the development of the iWatch or the Apple TV.

Final Words

It usually takes a long time before an Apple rumor materializes. The company had been in talks with China Mobile (NYSE:CHL) for a few years before it finally struck a deal. However, there were many incidents suggesting that those rumors had some credibility. Conversely, recent events don't point towards the fact that Apple is looking to acquire Tesla. In my opinion, these rumors are baseless and will never materialize. Therefore, I think investors should not buy Tesla based on this implausible speculation.

Disclosure: I 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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