Please ensure Javascript is enabled for purposes of website accessibility

Should Apple Buy Tesla Motors?

By Bob Ciura – Feb 24, 2014 at 2:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A flurry of M&A in technology is putting pressure on Apple to go on a spending spree. With Tesla CEO Elon Musk looking like the next Steve Jobs, should Apple acquire Tesla outright?

In light of all the mergers and acquisitions going on right now in technology, investors and analysts are increasingly looking for Apple (AAPL 4.86%) 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 (TSLA 7.67%). 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 (META 7.89%) 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. 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.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Stock Quote
Apple
AAPL
$148.03 (4.86%) $6.86
Meta Platforms Stock Quote
Meta Platforms
META
$118.10 (7.89%) $8.64
Tesla Stock Quote
Tesla
TSLA
$194.70 (7.67%) $13.87

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.