6 Reasons Apple Needs to Buy Netflix (Update)

Technology

Published: May 3, 2016 11:45 am

Last Updated: January 13, 2020 9:56 am

Apple Inc. (NASDAQ: AAPL) has something Netflix Inc. (NASDAQ: NFLX) does not. That is a platform of hundreds of millions of devices that can receive streaming media. Netflix has something that Apple does not. It has 81 million members worldwide, which dwarfs Apple TV.

Apple’s CEO Tim Cook said as the company released earnings that it may be time for it to make a major acquisition. Depending on how financial experts count Apple’s long-term marketable securities and money it holds offshore, Apple has access to $200 billion in cash. Because of its balance sheet, it also can borrow tens of millions of dollars more at low interest rates.

Apple’s problems can be summed up in its share price, which has dropped sharply. It is down almost 15% in the past month, driven for the most part by a sharp drop in earnings. In the most recently announced quarter:

…financial results for its fiscal 2016 second quarter ended March 26, 2016. The Company posted quarterly revenue of $50.6 billion and quarterly net income of $10.5 billion, or $1.90 per diluted share. These results compare to revenue of $58 billion and net income of $13.6 billion, or $2.33 per diluted share, in the year-ago quarter. Gross margin was 39.4 percent compared to 40.8 percent in the year-ago quarter

Investors worry that sales of its new iPhone SE are weak, and its new smartwatch product died on arrival. That leaves even the most optimistic investor waiting for the iPhone 7 release, probably in September. If iPhone 7 does not draw huge sales, Apple’s trouble could continue indefinitely.

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The reasons Apple should by Netflix:

1. Apple is desperate. No product extension has helped transform the company since the iPhone 5. Apple Watch has been a dud, and Mac upgrades have not been successful financially. Apple TV has not been successful either, certainly as measured against Amazon.com Inc. (NASDAQ: AMZN) and Netflix.

2. Netflix is cheap. It stock trades at $92, well below its 52-week high of $133. Netflix has a market cap of $39 billion. Even at a 50% premium, Apple can own the streaming video space for $60 billion.

3. Amazon built its Prime streaming media product into a powerful ecosystem, which includes its e-commerce free shipping, over 1 million songs and free storage. Prime is tethered to Amazon’s hardware, particularly the Kindle. Kindle readers get, for example, early access to some Prime content. In other words, Amazon already has built a hardware and content infrastructure that draws from the e-commerce site’s hundreds of millions of visitors.

4. Netflix has 81 million members in over 190 countries. This gives the company an insurmountable lead in its sector. It other words, its subscriber base cannot be developed. It has to be bought.

5. Netflix is profitable. Tech merger and acquisitions (M&A) activity is often driven by large companies that want to buy technology and not profits. Netflix made $49 million on $1.8 billion last month.

6. A combination of the two companies should be an example that synergy can be a by-product of some M&A transactions, although it is rare. There is early evidence that AT&T Inc.’s (NYSE: T) buyout of DirecTV has yielded cross-selling among satellite subscribers, 4G customers who use smartphones for streaming and subscribers to AT&T’s fiber to the home business, U-verse.

Apple has a chance to rekindle its growth and acquire an extension to its content operations, which include parts of iTunes and Apple TV. Because it has fallen into difficulty with its iPhone family, it needs another cornerstone.
Update: Apple will significantly change its faltering Apple Music division, according to Bloomberg:

Apple Inc. is planning sweeping changes to its year-old music streaming service after the first iteration of the product was met with tepid reviews and several executives brought in to revive the company’s music strategy departed.

Apple is altering the user interface of Apple Music to make it more intuitive to use, according to people familiar with the product who asked not to be identified because the plans aren’t public. Apple also plans to better integrate its streaming and download businesses and expand its online radio service, the people said. The reboot is expected to be unveiled at the company’s Worldwide Developers Conference in June. The changes will be accompanied by a marketing blitz to lure more customers to the $10-per-month streaming service.

Apple has provided the following guidance for its fiscal 2016 third quarter:

revenue between $41 billion and $43 billion

gross margin between 37.5 percent and 38 percent

operating expenses between $6 billion and $6.1 billion

other income/(expense) of $300 million

tax rate of 25.5 percent