Wedbush: Apple is in a quagmire, a sandbox and a sluggish car

How many ways can analyst Daniel Ives say that Apple is playing catch-up?

From a note to clients that landed in my inbox Monday:

Herein lies the quagmire for Apple; for a company that has a core DNA of organic driven R&D and has historically been against the concept of larger acquisitions (Beats at $3 billion in 2014 is its largest deal to date), now Cook & Co. find themselves with their back against the wall on the content and streaming front, which in our opinion will be the key to monetizing its 1 billion+ active device installed base worldwide. With the company spending $1 billion to $1.5 billion per year on video content Apple is brick by brick trying to build a content library with competitors such as Netflix, Amazon, Disney/ Fox among others (Hulu, etc) spending a combined $20 billion+ on content annually which makes Apple look like a kid in the sandbox while the adults watch from afar.

With inherent challenges coming down the road on iTunes/royalty amounts that Apple charges (e.g. Netflix recently stopped supporting iTunes) and a slowing smartphone market, Apple needs to morph its services/content strategy around a standalone video subscription service in our opinion that could launch by the end of 2019. While this sounds good on paper, Apple significantly lacks the core content to get its loyal customer base to pay $10 per month as Cook, Jony Ive (Chief Design Officer), Eddy Cue (head of Apple’s content strategy), and others on the leadership/strategy team continue to drive in the right lane at 55 mph, while competitors from all areas of technology and media are passing the technology stalwart in the left lane driving 100 mph in their new content sports cars.

The clock has struck midnight for Apple; now is clearly the time for content M&A. The M&A frenzy with Disney/Fox and AT&T/Time Warner has stepped up the content game significantly, as now Iger in particular is laser focused on driving content through its long awaited Disney standalone streaming service set to launch this year with a massive content presence now with 21st Century Fox in its back pocket.

Once Judge Leon let the AT&T/Time Warner deal be consummated after the DOJ battle, we believe this was the Fort Sumter moment that will unleash a major cycle of M&A around technology, content, media, and cable assets for the next few years with Apple in a “prime time position” to acquire massive content assets and transform its services business within another major growth vehicle on the video content. To this point, Apple could also decide to go after acquisitions on the consumer front (gaming platforms/content creators make strategic sense) as well to drive the services flywheel from other angles with a host of potential candidates that could be on the docket.

In a nutshell, ultimately with $250 billion+ of potential dry M&A powder now is the time for Apple to rip off the band-aid and finally do significant content M&A with the landscape ripe otherwise it will be a major strategic mistake in our opinion that will haunt the company for years to come, with content being the rocket fuel in the services engine that is currently missing in the portfolio.

Maintains Outperform rating and $200 price target.

My take: Color me unpersuaded. Apple doesn’t need to be Disney or Time Warner to keep its customers coming back. It just needs to ship great products.

8 Comments

  1. Jonathan Mackenzie said:

    The clock has struck midnight so it’s time to rip off the band aid while the landscape is ripe or they will be haunted for missing the rocket fuel. Got it.

    1
    January 14, 2019
  2. Gregg Thurman said:

    Yesterday, while rummaging through Prime’s library I discovered several new to Prime movies that I had already purchased on iTunes. Each purchase cost slightly more than a one month Prime subscription.

    Having a massive library isn’t the same thing as having a library of content people willing to pay to watch.

    Netflix is a very good example to spit wads thrown against a wall to see what sticks. I doubt one in twenty Netflix productions increases subscriptions. HBO has almost entirely moved away from the Stars, Cinemax, et al model (it’s 1970s roots) to almost entirely proprietary production of quality, subscription funded content.

    This is where Apple is headed in my view, and a production schedule that releases a new movie/TV series every other month is plenty fast enough, as long as it’s quality being released and not the vast amounts of tripe Hollywood is known for.

    3
    January 14, 2019
  3. Fred Stein said:

    Great. I’ll indulge some metaphors.

    Apple kinda employs Warren Buffett’s wisdom. One of his slogans, “There are no called strikes in investing”. Steve Jobs said, “I say ‘no’ a lot”.

    It is easy for Monday morning quarterbacks and armchair CEO’s to say what Apple should do or should have done, etc. This is more tempting when recent stellar performance creates a very high bar. Note Apple’s last five (not just four) reported quarters were all great, due the success of all X models and the global economy at peak performance.

    Both iPhone and the global economy are subject to cycles. No need to panic. Don’t expect Daniel Ives or the market to understand.

    As for big content acquisitions, it helps to look at how Apple has leveraged giants without taking ownership. Some obvious win/win examples: iPhone and the carriers;; Apple Pay and payment processors; Chips and the foundries; and of course, cameras, screen, etc.

    One last point on large acquisitions: It’s tough to make this work. You either overpay for high performers or you buy a bag of problems at an apparent discount. Integration costs and loss of talent make it worse.

    3
    January 14, 2019
  4. Gregg Thurman said:

    OT: is it me, or are foreign currencies stiffening against the US$?

    If so, then WS is sensing a strengthening of the world’s economy vs the US economy. If this is indeed a return to growth of the EURO zone (and possibly China, although I doubt the latter) it will become apparent by April guidance.

    This can be nothing but good for Apple, if my perceptions are correct.

    0
    January 14, 2019
  5. David Drinkwater said:

    Too much hyperbole. Fail.

    0
    January 14, 2019
  6. Martin Beutling said:

    I am not a big fan of Analysts who say: Apple has to do THIS or THAT…..but in this case, he is right.

    I would happily cancel my Netflix-subscription and double my monthly AppleMusic family-account, if Apple would include videos and tv-shows in it.

    But with every month, Netflix is getting stronger and stronger and keeps people hooked into their ecosystem.

    And I am not talking about buying Disney or TW, but a bigger investment in content is without choice….

    0
    January 15, 2019

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