Apple's (NASDAQ:AAPL) enormous cash hoard reached another milestone last quarter, surpassing $250 billion. Not surprisingly, this has sparked another round of complaints from investors who think that Apple should be using its cash to make some big acquisitions.
Other investors and analysts have been helpfully suggesting potential acquisition targets in recent weeks. One that frequently comes up is Netflix (NASDAQ:NFLX).
It's understandable that many investors want Apple to make a growth-enhancing acquisition. However, it would be virtually impossible for any potential target -- even Netflix -- to move the needle for Apple. This is a strong argument against paying a hefty price to buy the streaming-video leader.
Some investors are losing patience
Following Apple's earnings report, Ross Gerber, CEO of investment management firm Gerber Kawasaki, expressed frustration about Apple's reluctance to make a game-changing acquisition. "It should be illegal to have $250 billion in cash and not utilize it -- that is what you're supposed to do as CEO," he told CNBC.
This is a dangerous perspective to adopt. A better description of the CEO's job is to ensure that the company's capital is used well. In some cases, that means making bold acquisitions, but often it means refraining from big deals. Indeed, it's important that a CEO not feel compelled to spend money just because it's available.
Gerber ought to know better. After all, he recommended that Apple buy GoPro in late 2015, when its stock was trading for more than three times its current level. Had Apple taken his advice then, it would have wasted more than $5 billion to buy a company that is struggling to break even and has questionable growth prospects.
Netflix is a relatively rational target
For Apple, buying Netflix today would probably make more sense than buying GoPro a year and a half ago. Apple is in the midst of a big push to grow its services business, and Netflix would give it a huge boost in that area. Netflix already has nearly $10 billion of revenue -- all of which is recurring -- and is growing rapidly.
That's a big reason why Apple analyst Kulbinder Garcha has been plugging the idea of an Apple-Netflix deal recently. He also notes that there could be modest synergies with Apple's existing business, such as better terms from content owners and the ability to bundle Netflix with other Apple subscription services.
But Netflix wouldn't boost Apple's growth by much
During 2016, revenue surged 30% year over year at Netflix as the company's international expansion gained steam. This boosted its top line by more than $2 billion. Analysts expect Netflix to grow its revenue by an average of about $2.3 billion a year in 2017 and 2018.
However, while Netflix is a high-growth company on its own, this amount of growth would be virtually meaningless to Apple, which generates more than $200 billion of annual revenue. Relative to this base, a Netflix acquisition would provide a one-time revenue boost of 4%, while increasing Apple's growth rate in future years by about 1 percentage point.
To put it a different way, one of investors' biggest criticisms of Apple today is that it is unduly reliant on the iPhone. Indeed, in fiscal 2015, iPhone revenue surged by $53 billion, driving a $51 billion increase in the company's total revenue. By contrast, in fiscal 2016, total revenue and iPhone revenue both plunged by $18 billion.
The revenue growth from adding Netflix (or pretty much any other high-growth company) to the mix wouldn't smooth out these gyrations very much. Due to Apple's immense size, even a fairly large acquisition would provide only minimal diversification away from the iPhone.
And it would be way too expensive
The other problem with acquiring Netflix is that it would be phenomenally expensive. Netflix has a market cap of about $67 billion today. Including the value of employee stock options and a deal premium, Apple would probably have to pay at least $80 billion-$90 billion to buy it.
While Apple has tons of cash, 93% of it is held offshore. It would have to pay repatriation taxes of up to 35% to bring that cash home to buy a domestic company like Netflix. Thus, Apple might have to repatriate $130 billion of foreign cash -- roughly half of its total cash stockpile -- to buy Netflix.
Alternatively, Apple could issue debt to pay for a Netflix acquisition. However, given that it already has nearly $100 billion of debt, adding another $80 billion-$90 billion to its tab would be a dubious move. Furthermore, even if Apple were able to finance the deal at an ultra-low 2% interest rate, it would take several years for Netflix to increase its earnings enough to cover the additional interest expense -- let alone increasing Apple's profits.
This is quite a lot of trouble to go through for an acquisition that wouldn't meaningfully alter Apple's growth trajectory. Like it or not, investors need to recognize that the iPhone's success will continue to determine the company's fate for the foreseeable future.