Of the potential acquisition targets that have been widely speculated as possible targets for Apple (AAPL), JPMorgan analyst Samik Chatterjee told investors he believes Activision Blizzard (ATVI), Sonos (SONO) and Netflix (NFLX) offer the best strategic fit to accelerate Services growth and leverage its installed base. Statingthat there "needs to be serious contemplation" around significant acquisitions to drive services growth over the coming years, his peer at Wedbush said last month that he sees A24, Lionsgate (LGF.A; LGF.B) and Sony Pictures (SNE) among the highest probability M&A targets for Apple.
BEST STRATEGIC FITS: Despite Apple itself offering no comments on the subject or giving any indication to investors of its intentions, potential acquisition targets for the company have been widely discussed in press reports on a regular basis, JPMorgan's Chatterjee told investors in a research note on Monday. The analyst noted that the speculation has included a wide range of industries, from automobile manufacturers like Tesla (TSLA), to information platforms like Twitter (TWTR), and has likely in part been driven by the $130B of net cash on Apple's balance sheet, an average of $45B of cash flow generated each year after dividends, and stated target of being in a net cash neutral position long-term without accompanying details on the roadmap. Of the potential acquisition targets that have been widely speculated, Chatterjee finds three industries to be of the most strategic value to Apple for potential deals, namely video gaming, smart home speaker and video content, as they provide potential growth opportunities to leverage Apple's services over a wider installed base. The analyst argued that video gaming stands out as a potential sector target given the combination of leverage to an industry rapidly transitioning to mobile, hardware capabilities for high-end gaming potentially supporting a replacement cycle, synergies in gaming services with iPhone's hardware leadership, and access to installed gaming hardware of hundreds of millions of units. Among targets mentioned in press reports, he finds Activision Blizzard to be the best strategic fit. Smart home speakers also stand out, Chatterjee noted, given the combination of focus on high engagement with customers, synergies in driving Apple Music services, currently lagging competitors in the smart home category, with Sonos seen as the best strategic fit due to its differentiated position as a premium home speaker system relative to Amazon's (AMZN) Alexa and Google Home (GOOG; GOOGL), strong loyalty among current consumers, and robust international presence. Lastly, the analyst also sees video content as another possibility given the combination of leverage to rapid growth in content consumption on mobile, an established platform to accelerate Apple's nascent investments in original content, and opportunities for advertising revenues in the future, enhancing Apple's position as an aggregator of content. Among potential targets, he finds Netflix as the best strategic fit, although he appreciates a combination is less likely "as Netflix is unlikely to be a seller for a modest premium." The analyst has an Overweight rating and $228 price target on Apple shares.
CONTENT M&A: In a research note to investors back in January, Wedbush analyst Daniel Ives said he believes Apple is facing a "code red" situation in China and will need to "aggressively" cut prices on the iPhone XR. Further, the analyst argued that there "needs to be serious contemplation" around significant content acquisitions to drive services growth over the coming years. While he believes a standalone subscription video content service from Apple is on the horizon for the next year, the analyst noted that the company is "playing from behind the eight ball" in this content arms race with Netflix, Amazon, Disney (DIS), Hulu, and AT&T(T)/Time Warner all going after this next consumer frontier. Ives he sees A24, Lionsgate and Sony Pictures among the highest probability M&A targets, Viacom (VIA; VIAB)/CBS(CBS) and MGM Studios among the medium probability M&A targets, and Netflix, Disney, and Gaming platform/video game publishers among the low probability M&A targets.
PRICE ACTION: In morning trading, shares of Apple have gained over 2% to $170.07. Meanwhile, Netflix shares are up nearly 3% to $348.90, Activision Blizzard has advanced over 1% and Sonos is up 7.5% to $13.08 per share.
Apple
+3.73 (+2.24%)
acquired by MSFT
+0.61 (+1.33%)
Sonos
+0.9 (+7.40%)
Netflix
+9.21 (+2.71%)
Lionsgate
-0.13 (-0.73%)
Lionsgate
-0.14 (-0.82%)
Symbol now SONY
-0.1 (-0.22%)
Tesla
-3.67 (-1.17%)
+0.5 (+1.51%)
Amazon.com
+11.29 (+0.69%)
Alphabet
+11.61 (+1.05%)
Alphabet
+12.57 (+1.12%)
Disney
-0.24 (-0.22%)
AT&T
-0.15 (-0.50%)
Via Renewables
+ (+0.00%)
VIAB
+
Use VIAC, VIACA
-0.01 (-0.02%)