Apple Inc. should not acquire Tesla Motors Inc or Bayerische Motoren Werke AG because large acquisitions can create problems for the company, Investor’s Business Daily reported. Mizuho Securities also said in a research report that India is unlikely to replace China in the U.S tech giant’s revenue stream. Investors seem to be worried about slowing iPhone sales as well as disappointing Apple Watch sales as the stock has dropped by over 14% during the past six months.
Apple Can Benefit From Media Company Acquisition
Analysts at Mizuho Securities believes that it’s better for Apple Inc. to buy a media company such as Netflix, Inc. or Time Warner Inc . The iPhone maker should stay away from an offer making for Tesla or BMS, analysts said, noting that a large acquisition would pose risks.
“Management typically favors smaller, tuck-in acquisitions with the largest transaction being Beats that was valued at $3 billion … larger acquisitions that require significant integration efforts could pose an execution risk to Apple’s strategy, especially considering the company’s annual cadence of product updates,” the bank said.
The estimate cost to buy Tesla would be “around $45 billion net of Tesla’s cash and debt,” according to Mizuho. The estimate is based on a 50% premium to the company’s current stock price. The Tesla acquisition would be dilutive to free cash flow (FCF) until 2020. BMW would cost $80 billion, but the deal would be accretive to FCF. The tech company, in both cases, would have exposure to “the cyclical nature of the auto industry and its exposure to broader macro cycles,” according to the report.
The take-out value of Netflix would be about $55 billion. Mizuho did not estimate the buyout cost for Time Warner, which has a market cap of about $59 billion.
“At [its] current price, Apple is not trading as a growth company and risk/reward seems attractive. Our analysis of the life time value of an iPhone customer indicates fair value of the stock in the $120-130 range. Within the supply chain, AVGO and NXPI offer good investment opportunities. Our Japan team recommends Sony,” 247 Wall St reported.
India Cannot Replace China
Mizuho said in the report that India isn’t likely to compensate for the company’s slowing sales in China. India cannot replace China in the company’s revenue stream “due to lower wages, strong incumbents at very attractive price points, lack of carrier support and the political environment,” according to analysts. India will only be able to support 4% to 5% of the company’s revenues. “That might not be enough to move the needle in the [near-term],” the analysts were quoted as saying by 247 Wall St.
Increasing worrying for Apple’s investors, Mizuho said that the company is “at a crossroads with no clear path to growth.” The bank noted that slowing and disappointing sales indicate that the growth pattern of the past few years may be slowing.