Spending money just because you have it is a dangerous strategy. Few investors have been rewarded over the years because a company piling up profits thought it should make an acquisition just because it had plenty of cash, and
Apple reported it had $237.6 billion in cash (including its investment portfolio) at the end of the quarter, a big enough hoard to buy almost any company Cook & Co. set their gaze upon. Given the value of content within the Apple ecosystem, and this week's $85 billion takeover of HBO parent
Goldman Sachs' analysts tried to read between the lines of Cook's conference call commentary. "We're open to acquisitions of any size that are of strategic value where we can deliver better products to our customers and innovate more," the Apple CEO said. Though that sounds awfully familiar to the common refrain about being open to possibilities Cook has trotted out before, Goldman's read is that it signals "a seemingly increased appetite for content and M&A."
Morgan Stanley agreed. "Services growth accelerated again, and we think Apple has an appetite for
content acquisitions that could boost or even transform this business," wrote analyst Katy Huberty.
J.P. Morgan's analysts are less convinced that any changes are brewing on the dealmaking front. "Apple continued to say they are intensely interested in [Media] but we believe their strategy could be morphing into a distribution channel only with the App Store augmented by a small amount of their own content," the firm's earnings note said.
The biggest deal in Apple's history was the $3 billion takeover of headphone-maker Beats, a deal that would pale in comparison to the tens of billions of dollars it would take to acquire a business like oft-touted potential target
While there's ample evidence of big takeovers that failed spectacularly, the frustrating thing for investors is that Apple has not been able to translate its massive cash position into any confidence-boosting growth initiatives.
In Tuesday's earnings release the company touted the $186 billion in capital it has deployed to shareholders via dividends and buybacks since mid-2012, and the $16.1 billion in operating cash flow it generated in the third quarter. But those figures came against a backdrop of declines in earnings, revenue and iPhone sales versus a year ago.
One factor bolstering the case for a major content acquisition is the accelerating growth of Apple's Services business. Revenue was up 24% in the quarter, easily the company's best-performing segment, but services revenue is still just $6.3 billion, compared with $28.2 billion in iPhone revenue. Buying a company like Netflix could quickly add a few billion more, but it will take years of growth (or a steeper decline from the iPhone business), before the two segments are anywhere near equal footing.
A strong case against making any kind of big takeover would be made even stronger if Apple can reverse its earnings malaise, and some observers think that reversal is soon to arrive. "We are more confident that Apple revenues and earnings per share have bottomed barring a serious recession," Raymond James' Tavis McCourt wrote, predicting an expansion of the company's earnings multiple.
Apple shares, which hit their high for the year in September, were down more than 3% at the opening bell Wednesday.