In light of all the mergers and acquisitions going on right now in technology, investors and analysts are increasingly looking for Apple (NASDAQ:AAPL) to make a big purchase. Apple has famously come under attack over the last few years for its waning growth. Some feel Apple has lost its innovative magic.
Since Apple has a massive pile of cash on its books, there's a great deal of speculation about which companies Apple should buy. The target of the day is Tesla Motors (NASDAQ:TSLA). Chief Executive Officer Elon Musk has his own star power, and Tesla's stock has soared over the past few years. Many believe Tesla to be the next Apple in terms of revolutionizing its industry, and as such, an acquisition seems to make perfect sense.
Apple just doesn't seem to be in any rush to buy Tesla, which may be disappointing to some. However, just because Apple could buy Tesla, doesn't necessarily mean it should.
Apple needs to do more with its cash
There's a lot of pressure on Apple to do something with its massive cash hoard beyond just buying back its own stock. There's good reason for this argument, since it's becoming clear that Apple has more money than it knows what to do with. At the end of its most recent quarter, Apple reported $158 billion in cash, short-term investments, and long-term marketable securities. Apple has more than enough cash to fund its organic growth initiatives, pay its dividend, buy back tens of billions of its stock, and make a massive acquisition.
Apple's cash hoard is starting to burn a hole in its pocket. The company isn't getting credit from the market for its cash pile. Apple's valuation stands at just 13 times trailing earnings. In fact, putting some of its cash to work may actually help to unlock shareholder value, since Apple's cash on the books is earning almost nothing in interest.
The M&A boom puts additional stress on Apple
There's pressure on Apple to do something big, in light of the other megadeals swirling throughout the technology industry. Facebook (NASDAQ:FB) announced it will purchase messaging service WhatsApp for $19 billion. As a result, Apple's investors may be concerned that the company is falling behind the technology curve. There's clearly a party going on in Silicon Valley right now, and it seems like Apple is missing out.
At the same time, it appears Facebook vastly overpaid for WhatsApp. WhatsApp offers a service that competes with text messaging, and as happens so often, industry observers are fawning over WhatsApp as the next big mobile hit. But underneath the hype is a company with a questionable business model.
WhatsApp offers its service for free for one year, then charges users $1 per year after that. WhatsApp doesn't carry ads, either, which makes it unclear how the company actually makes money. WhatsApp hasn't revealed its sales figures. That clearly didn't matter to Facebook. WhatsApp has 450 million monthly users, which seems to be what Facebook craved.
As a result, if Facebook is content tossing around tens of billions on a fairly speculative deal, why shouldn't Apple?
Peer pressure is not enough to sway Apple
It was reported throughout various media outlets that Apple's head of mergers and acquisitions met with Tesla last year to discuss a possible buyout. Apple may want to get its products into cars; whether it wants to be an outright car manufacturer is a different story. And the cost of buying Tesla likely scared Apple away. Tesla's valuation has exploded to about 135 times forward earnings estimates, according to Yahoo! Finance.
Apple could absolutely afford to absorb Tesla's $26 billion market value. That doesn't necessarily mean it should, however, especially in light of the fact that Tesla isn't yet consistently profitable. It's understandable why so many investors feel Apple needs to do something with its cash. All that money sitting on the sidelines is not productive. At the same time, wildly overspending on an acquisition with a fair probability of writing off the asset a few years from now wouldn't be productive, either.
Apple met with Tesla, considered the acquisition and the associated costs, and backed away. There was probably a good reason for this.
Bob Ciura owns shares of Apple. The Motley Fool recommends Apple, Facebook, and Tesla Motors. The Motley Fool owns shares of Apple, Facebook, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.