Apple (AAPL 0.21%) has historically not been one to make splashy acquisitions. The California tech giant made its largest purchase in 2014 by buying Beats Electronics for $3 billion. For a business valued today at close to $3 trillion, this was a tiny amount spent to propel Apple into the audio device business.
A new potential target, Peloton Interactive (PTON 6.39%), might make sense for Apple to look at right now. The at-home fitness company was approaching a $50 billion market cap 12 months ago, but it has since fallen out of favor with Wall Street as the pandemic surge has faded. At the same time, Apple is in the midst of making a big push in the health and wellness space.
Could it be a good idea for Apple to buy Peloton? Let's take a look.
Image source: Getty Images.
Apple can easily afford this acquisition
As of Sept. 25, Apple had $172.6 billion in liquidity on its balance sheet, which includes cash, cash equivalents, and marketable securities. This is a gargantuan amount, and based on Peloton's current market capitalization of $12 billion, Apple would have no problem executing an all-cash transaction (although it would definitely be at a premium to Peloton's current share price).
If Apple bought Peloton tomorrow and the purchase ultimately didn't work out for whatever reason, it wouldn't make much of a dent in Apple's financial position. Apple produced $20.5 billion of net income in the latest fiscal quarter, and it generates ample amounts of free cash flow. Even if the deal were a flop, Apple would move on. In other words, the price tag is attractive, lowering the financial risk.
Apple knows all about hardware differentiated by software
At a high level, both Apple and Peloton sell expensive hardware products that are differentiated by their own proprietary software. What makes the Apple iPhone or the Peloton Bike special is not necessarily the physical component (they both do possess elegant designs, though), but the underlying software powering it.
Once people switch to an iPhone, it's nearly impossible for them to leave as they get comfortable being in Apple's ecosystem. And for Peloton customers, being able to access a huge and growing catalog of various workouts and having performance metrics tracked is something that raises switching costs. Peloton has also incorporated a fun social environment to working out that entices users.
Most importantly, buying Peloton would give Apple another avenue to attract more consumer attention and collect more data on a daily basis. That's a serious advantage in today's digital economy. We are already glued to our smartphones throughout the day. Paying $12 billion to acquire and control the 30 to 60 minutes a day that people exercise seems like a smart financial decision for Apple.
Apple wants to be a force in health and wellness
In 2019, Apple CEO Tim Cook claimed that Apple's greatest contribution to mankind "will be about health." While Peloton operates in the niche and expensive market for connected-fitness equipment, Apple has bigger ambitions to be a major player in the overall health and wellness space. And the Apple Watch, coupled with upgraded features like fall detection, an ECG App, and Medical ID, can appeal to a much broader audience. The newest Apple Watch, Series 7, starts at $399, far less than Peloton's Bike at $1,495. Apple's Fitness+ offering is also very compelling for workout junkies.
Nonetheless, bringing Peloton under Apple's ownership would allow the latter to acquire innovative technology and top talent. Furthermore, Peloton will immediately give Apple a leading position in the at-home fitness market, and both companies can come up with exciting ways to integrate their products in pursuit of the shared goal of making the world healthier. Peloton would also benefit from Apple's competency at managing a global supply chain.
Why shouldn't Apple acquire Peloton?
The fact that Peloton's market opportunity is too small for Apple is the obvious reason why this wouldn't happen. Apple wants to attack huge industries, with the entire population essentially as its total addressable market. Offering up expensive exercise equipment doesn't fall under that category.
I haven't read anything about this deal being on the table, but it's an interesting thought experiment for investors. Were an acquisition to happen, it would benefit Peloton far more than it would Apple.
