Apple (AAPL) and Time Warner (TWX)

I read in the Financial Times recently that late last year AAPL approached TWX with the idea of buying it.  This follows on the heels of an announcement that AAPL has invested $1 billion in a local rival to Uber in China.

What ties the two moves together is that both are substantial deviations from the production of tech hardware, which is AAPL’s professed core business.  The Didi Chuxing move is a drop in the bucket, however.  The price tag for TWX would amount to perhaps 20% of AAPL’s market cap of $527 billion.  That would be a transformative acquisition.

What does this activity mean?

APPL generated about $40 billion in cash flow during the first six months of fiscal 2016 (its fiscal year ends in September).  All but $5 billion of that amount went, as usual, into the company’s holdings of cash and marketable securities, which now tops $230 billion. That’s almost a quarter of a trillion dollars, and represents almost half of AAPL’s market capitalization.

Sales of the iPhone are beginning to slow.  The worldwide market for smartphones is saturated, for all but the cheapest models.  So all vendors, including AAPL, are increasingly reliant on replacement demand.  This means smartphones, by far the largest part of AAPL’s business, won’t in the future show anything like the spectacular growth of the past.

This is not exactly news.  AAPL shares are down by 25% over the past year, while the S&P 500 is roughly unchanged.

To remain a growth stock, AAPL has to reinvent itself.  It has already done this twice, with the iPod and the iPhone.  This time, however, management appears to be conceding that there’s no obvious, internally developed way for it to move forward. A related issue: as currently configured, AAPL has no way to reinvest the enormous amount of cash on its balance sheet.

AAPL has apparently concluded that it needs to buy something, or somethings, that will significantly change its character.  The TWX news signals it is prepared to act (who leaked the story, about a half year after the approach?  Why now?).

The possibility of one or more large acquisitions adds a risk element not previously present with AAPL.  On the other hand, the idea that, ex acquisitions, the company will slowly begin to resemble a certificate of deposit isn’t exactly appealing, either to outside investors or to employees holding stock options.  And the sharp drop in the shares over the past 12 months must already discount something, as does a PE of around 10.

What to do?

As for me, I don’t own AAPL shares now and haven’t owned them for a long time.  If I did, I’d probably be intensifying my search for new names, with the intention of using my holding as a source of funds.






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