Apple (NASDAQ:AAPL) is in a funk these days, and a lot of armchair CEOs are suggesting that the tech giant buy its way out of its current jam. Barron's over the weekend ran a piece suggesting that Nintendo (NASDAQOTH:NTDOY) should be Apple's next acquisition target.
We've been here before. In the past couple of years, there's been a groundswell of financial media coverage and social media wishful thinking in support of Apple buying Netflix (NASDAQ:NFLX) and Tesla Motors (NASDAQ:TSLA). Apple's bountiful greenery on its balance sheet is going to make it an obvious sugar daddy when it comes to mega caps with differentiated products in commoditized industries. The class act of Cupertino is unlikely to buy any of them, even as its revenue and iconic iPhone declined during the recently concluded holiday-containing fiscal first quarter. Let's break down the reasons why Apple isn't buying Nintendo, Netflix, or Tesla.
Tech Trader columnist Tae Kim makes an initially convincing argument for Apple to buy Nintendo in the latest Barron's. Nintendo shares a lot of Apple's traits. Both companies are flush with cash, have juicy ecosystems, and rabid platform fans. Kim also points out how Apple's longtime rival is already a major player in console gaming through its Xbox franchise. Why wouldn't Apple buy one of the other two major platforms, especially when Nintendo has has the most differentiated platform and niche audience?
Let's start with the cyclical nature of Nintendo. It's doing pretty well now, but keep in mind that it experienced eight consecutive fiscal years of declining revenue before bouncing back this year. Does Apple and its investors have the patience for those kinds of lulls? Kim also alludes to how Apple could get Nintendo to beef up its mobile pipeline, but is that really in Nintendo's best interest?
Nintendo made a ballyhooed jump into Apple's App Store marketplace three years ago with Super Mario Run. Outside of a couple of subsequent releases and the success of the third-party developed Pokemon Go we've seen a reluctance to go all-in when it comes to mobile apps. It could be that Nintendo's controller-based gameplay doesn't translate well when ported to smaller touch screens. One can also argue that free or cheap digital diversions devalue the brand. The biggest knock on Nintendo's prospects in mobile despite some killer brands is that mobile gamers are fickle. The level playing field also doesn't help. This isn't Nintendo's console stronghold where the three dominant platforms dominate. There isn't much of a moat in the app ecosystem, and even if an Apple-owned Nintendo could give users a nudge in that direction for their gaming needs how do you think the hundreds of thousands of developers would vie the App Store? This would be a huge conflict of interest.
There was a time -- somewhere in the rubble of the 2011 Qwikster aftermath -- that Netflix could have probably been had for a song. It was on the ropes, and if a tech giant wanted a premium distributor of rented content that was an early leader in subscriber-based streaming, Netflix and its shareholders would be all ears to an exit strategy. Why is everyone trying to pair Netflix up now that it's a market darling?
Appflix isn't going to happen. Netflix has firmly established itself as the top dog in premium video with more than 137 million streaming subscribers at the end of the third quarter. On Thursday, we'll find out that we're now well north of 145 million accounts worldwide. It's easy to see why Netflix would look good on the arm of anyone bent on increasing the steady trickle of growing subscription revenue. Apple's services revenue continues to be a shining light for the out-of-favor consumer tech behemoth. However, why would Netflix investors accept any buyout with its recent momentum? Netflix stock has averaged a better than annual 90% return over the past six years. This isn't a company that's going to take a 30% or even 40% premium to its $150 billion enterprise value, and Apple isn't going to get away with a stock deal given its declining currency.
There is probably a healthy overlap of Tesla drivers also owning Apple iOS-based gadgetry. Apple has more than a passing interest on tech-filled cars. Tesla and Apple are two companies that have passionate fan bases in a realm where cheaper alternatives are readily available.
You can keep listing the reasons why Apple and Tesla belong together like peanut butter and jelly, but it's just not going to happen. Apple isn't buying Tesla. The price would be dear, given Tesla's richly priced shares and Apple's stock price would crater in response to the valuation hit. Apple also can't afford to have a social media loose cannon like Elon Musk around, yet Tesla without him suddenly becomes that much less valuable and interesting.
Apple doesn't need to buy Tesla to prosper with the innovative carmaker's success, as partnerships will help it cash in without suppressing its own profitability. Tesla is a scintillating growth stock on its own. Apple has a clear path to turning things around in the coming quarters. Combine the two companies and both of those positive attributes go out the window -- the car window.
Rick Munarriz owns shares of Apple and Netflix. The Motley Fool owns shares of and recommends Apple, Netflix, and Tesla. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.