Opportunities for Apple (AAPL) to Lift Stock Through Acquisitions, J.P. Morgan Says


Apple (AAPL) is finding itself in unchartered territory — bearish territory. Though the stock is off to a good 2019 (up about 8%), shares are down about 27% since October. The company has faced challenges on multiple fronts, including slower iPhone sales, questions of product pricing and patent lawsuits in Europe and Asia. But it’s hard to discount a company that (aside from being among the most recognizable brands in the world) is sitting on hundreds of billions of dollars of cash. Cash that can go to continuous stock buybacks or dividends, or the most exciting — acquisitions. Though rumors have swirled over the years of Apple acquiring Tesla or Netflix, nothing spectacular has come of their enormous cash holding, even as the company says it will be used in the coming years.

JP Morgan analyst Samik Chatterjee sees a lot of good the company can do with the money, as he maintains his Overweight rating on AAPL stock with $228 price target. (To watch the analyst’s track record, click here)

Chatterjee says a survey of press reports “shows that speculation [over acquisitions] has included a wide range of industries, from automobile manufacturers, like Tesla, to information platforms, like Twitter. Speculation has likely in part been driven by the ~$130 bn of net cash on Apple’s balance sheet, an average of $45 bn 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.”

Though his focus is on acquisitions, the analyst concedes that “investors hardly seem to be complaining about the massive buyback pace, including ~$73 bn last year,” though believes investors “do hope the firm uses its balance sheet strength to insulate the business against often-seen disruptions in the technology landscape, some of which Apple itself has driven in the past.”

Chatterjee sees three industries “to be of the most strategic value, providing potential growth opportunities to leverage services over a wider installed base;” video games, smart home speaker and video content. Gaming stands out for multiple reasons, including “leverage to an industry rapidly transitioning to mobile [and] hardware capabilities for high-end gaming potentially supporting a replacement cycle.” The analyst says smart home speakers “also stands out” because of “synergies in driving Apple Music services” and that Apple is “currently lagging competitors in the smart home category.” Finally, on video content, the analyst says Apple has the ability to “leverage to rapid growth in content consumption on mobile…[and provides] opportunities for advertising revenues in the future.”

Overall, Apple has drawn optimism mixed with caution when it comes to consensus opinion among sell-side analysts. Out of 35 analysts polled in the last 3 months, 17 are bullish on AAPL stock, 18 remain sidelined. With a slight return potential, the stock’s consensus target price stands at $176.80, revealing apprehension baked into analysts’ expectations. (To see Apple’s price target on TipRanks, click here)

 

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