Last week, GoPro (NASDAQ:GPRO) jumped 10% after tech analyst Daniel Ives of FBR Capital suggested Apple (NASDAQ:AAPL) should consider acquiring the action camera maker. In his research note he also named Adobe (NASDAQ:ADBE), Tesla (NASDAQ:TSLA), and Box (NYSE:BOX) as potential targets for the iMaker.
On this episode of Tech Industry Focus, Motley Fool analysts Sean O'Reilly and Dylan Lewis examine what Apple looks for in an acquisition and explain why they don't expect to see any of these under the company's umbrella any time soon.
A full transcript follows the video.
This podcast was recorded on Dec. 11, 2015.
Sean O'Reilly: Will Apple be going on a shopping spree? On this technology edition of Industry Focus. Greetings Fools, I am Sean O'Reilly joining you here from Fool headquarters in Alexandria, Virginia. It is Friday, December 12th 2015 and joining me to talk tech is the awe-inspiring Dylan Lewis. What's up, man? Did you miss me?
Dylan Lewis: I missed you a little bit, yeah. We had a little, it was more than a 2-week hiatus, right?
O'Reilly: Because we had a holiday, which ...
Lewis: We had a holiday.
O'Reilly: ... everybody missed us 2 weeks ago.
Lewis: Yeah, so the day after the Friday after Thanksgiving, we did do a show. And then you were still out last Friday, and I did the show with Vince. So ...
O'Reilly: Did you guys have fun?
Lewis: We had a good time. I think we held it down pretty well. You could tell. It's a little weird hosting if you're used to not hosting and having to do the intro, and the pitch and the disclosure and everything.
O'Reilly: Well even when we switched we had a bit of a hard time changing hands.
Lewis: Yeah we made it work though.
O'Reilly: So before we move on I actually wanted to give a shout-out to the gentlemen that gave us a board game.
Lewis: Yeah, yeah. So what was that? Three or four episodes ago? We did the rock, paper, scissors shoot to determine who would talk.
O'Reilly: Yeah let me pull this up.
Lewis: Oh that was the beat-up tech stock episode where we talked about a couple of companies that hadn't been doing so well and to settle who was going to talk first, we did a little rock, paper, scissors shoot and we talked about how at tic-tac-toe was not such a great game because as adults it's pretty hard to determine a winner.
O'Reilly: It's a tie.
O'Reilly: Like it's a cat game as it was.
O'Reilly: So Jeff Pinsker sent us not only a 3-D tic-tac-toe game that his company created, but sent us a very nice letter and Jeff if you're listening, feel free to stop by the Alexandria office anytime. If we're ever in Plano, Texas we will definitely stop by.
Lewis: Yeah, yeah. Thank you for listening, Jeff. We have not yet played the game, but I'm thinking maybe this afternoon over a beer, Sean and I will christen the game.
O'Reilly: We'll take a photo and send it to you, Jeff. And to all our other listeners that we're not giving a shout-out to, Christmas is around the corner -- hint, hint. I'll maybe post my ...
Lewis: Your Amazon wish list?
O'Reilly: I've been good this year. My Amazon gift list.
Lewis: Jeez -- shameless.
O'Reilly: Shameless, shameless plugging. I know Kristine Harjes, she's a bourbon fan for all of you that want to ...
Lewis: Yeah, healthcare analyst.
O'Reilly: Yeah, give her a stocking stuffer. Anyways. Sorry. Had to do that Dylan. I'm sorry. So for our listeners that are not aware, Dylan, what happened to GoPro this week?
Lewis: Yeah so GoPro, a stock that a lot of Fools follow, I know it's a wreck for some of our premium services, shot up 10% yesterday. And this of course, Thursday of this week.
O'Reilly: Those poor short sellers.
Lewis: Yeah, right? And so this was not due to earnings or particularly strong numbers from a supplier like Ambarella, anything like that. Nothing tied to their core business. This came largely because of a note from FBR & Co's tech analyst, Daniel Ives. And he posted something about Apple earlier this week. And I'm just going to quote him here, "We believe Cook," Tim Cook's, "crystal ball is now focused on building out new technology growth frontiers and product areas over the next decade. Although we can clearly see Cupertino focusing on a number of skunkworks initiatives (e.g., Project Titan, virtual reality-Faceshift, etc.), in 2016 and not pursuing major M&A prospects, with $200 billion in cash in the coffer (and growing), we can finally envision Apple making a larger acquisition, as the conditions are ripe for Cook to make a move in our opinion."
That specific note went on to cite GoPro, Tesla, Box, and Adobe as attractive acquisition targets for Apple.
O'Reilly: So two things come to mind. One, he's thinking too small. The Federal Government of the United States is for sale for $200 billion. Cook for president, man.
Lewis: Watch what you wish for.
O'Reilly: Do you realize how cool it would be? The Capitol building would be a giant Apple store. Okay, so I was actually kind of surprised he was as bold as to name those names. Is he allowed to do that?
Lewis: Yeah I mean this is a speculative research note, right? And I think it's him pointing out a couple companies with nice tie-ins to either ...
O'Reilly: Cool tech.
Lewis: ... things that Apple is currently doing or things that they are looking to build out a little bit more in the coming decade. Kind of what he eludes to here.
O'Reilly: So let's run these down.
O'Reilly: Just real quick, so ...
Lewis: Yeah I think we'll just kind of run through the companies and then kind of get into does it make any sense.
O'Reilly: So first and foremost is GoPro. Everybody's favorite, the highly active camera company, something. I don't know.
Lewis: Action camera? Never mind.
O'Reilly: Action camera. Well I also think is that the word I want to go for? Like I don't know, anyway. I've never jumped off a cliff with a camera on my head, sorry.
Lewis: Fair. Have you seen Nick Woodman on Shark Tank recently?
Lewis: Pretty cool. It's weird to see him all buttoned up because he's usually like at the press events with a camera in his mouth.
O'Reilly: Oh that's right, yeah. I'm sorry I did see one episode. Actually believe it or not I'm not as big of a Shark Tank fan as my wife is. So, anyway. So GoPro. Market cap of $2.6 billion. Price of sales of a surprisingly reasonable 1.5.
For our listeners that don't know, are they profitable? What do they do? Why would Apple want them?
Lewis: Yeah so they're the action camera manufacturer we were talking about. They are profitable. I think probably the most realistic of the four, for a variety of reasons, is also the only company out of the four to move on this news. Good testament to the fact that it's probably the most likely of those four for anything to happen with Apple. So you look at the valuation, you said price of sales 1.5, I think they're trailing 12-month P/E is somewhere in the neighborhood of 15 right now.
O'Reilly: Also surprisingly reasonable.
Lewis: They're well below market for a particularly high-growth company. Their sales project out pretty well, at least for the common quarters. A lot of people are worried a little bit more about the long-term viability and ...
O'Reilly: Plus just competition.
Lewis: ... and market saturation too is an issue with them. But so on a valuation basis, it's the most attractive by far. I think also the product offering fits fairly well within Apple's consumer tech expertise. It also plays well into the VR Drone kind of future that a lot of people are forecasting out.
So I think that's why we saw this big move based on this news, and a lot of the headlines that I saw following this particular research report said, it was like "Led with GoPro Acquisition Target" for Apple. And then it was like, also Adobe -- yadda, yadda, yadda. You know, so GoPro is the headline one by far. For what it's worth, GoPro was actually downgraded to a neutral by Citigroup also this week. So just goes to show analysts are all over the place, but that's kind of the rundown with them and why it might make sense.
O'Reilly: Do you think Tim Cook read any of this?
Lewis: Probably not. He must get like a press briefing every morning or something like that.
O'Reilly: Oh you think ...
Lewis: Yeah I would think so. It's like, "Hey this is what's going on and this is what people might ask you about."
Lewis: He's like the president.
O'Reilly: Yeah, no he is like the president once again. Yeah my thoughts have proven oppression.
Lewis: And so the second one on that list, Tesla, market capital of $30 billion, current price of sales of 7.5. Sean, you know the industrials and car manufacturing space a little bit better than I do. You want to take this one?
O'Reilly: I do. Currently not profitable. Tesla, as you mentioned has a market capital of about 30, it's actually $29 billion. This is this $30 billion market cap has made everyone's favorite Ironman-like billionaire, Elon Musk, put him on the Forbes list of a net worth of 8, 9, $10 billion all basically on the backs of the success of the Model S which of course has actually broken all records in terms of quality by Car and Driver. They got the first perfect rating. And future growth and this relates to one, the Model X which is going to come out next year and that's got those hip cool falcon wing doors. Have you ever seen those?
Lewis: No, no.
O'Reilly: I'm going to show you photos later and you're just, you know like, what? Like supposedly it saves space. Anybody that's curious go to Google images, type in Tesla Model X and you'll see what I'm talking about. It also protects you from the rain.
And really the big enchilada is actually not a big enchilada at all, it's actually rather small. It's their smaller version and it's going to be the Model 3. It's going to come out in 2017, we'll get to see a model of it next year, and it's going to be priced at about $35,000 -- which is surprisingly reasonable for a Tesla.
Lewis: Yeah by their standards that's like mid-market.
O'Reilly: Like yeah, and it's $35,000. Believe it or not, analysts are surprisingly bullish on the potential profits we had with the release of the mass market Model 3. I couldn't believe this and you're a shareholder, correct me if I'm wrong.
Lewis: I am, yeah.
O'Reilly: So, you tell me if you buy into this. But they're supposed to earn 8, $9 per share by 2019. Wow.
Lewis: It's ambitious.
Lewis: I'd love to see it.
O'Reilly: Okay. This, Elon Musk is supposedly going to take a less active role once the Model 3 is out there and rolling. If the company were to be sold, it would actually be after that point. Given Musk's actual lack of interest in actually making money, which sounds crazy for a billionaire, I just don't see this happening.
Lewis: Yeah I think it's a tough sell for a lot of reasons. I mean you look at market capital alone, so they're currently trading somewhere they'll give them like a $30 billion market cap. You think about the premium that Apple would have to pay on top of that to be able to take the shares off the market.
O'Reilly: It'd be crazy.
Lewis: It'd be crazy.
O'Reilly: We're talking 50, $60 billion, I don't know.
Lewis: Yeah, easily. And another thing to keep in mind here is the margin profile for the automotive industry is totally different than the margin profile for consumer tech, right?
O'Reilly: On top of that, Apple's already designing their own car supposedly. So I don't know, would they just buy it for the technology which is arguably awesome? I don't know.
Lewis: Yeah. And the speculation with the Apple car is do they want to get into the actual nuts and bolts of making cars, or do they just want to provide the in-car platform that people would use?
O'Reilly: And then partner.
Lewis: We just don't really know what those ambitions look like. But again, they have their own initiative in place and Tesla would be an extremely expensive acquisition for them.
O'Reilly: You hear all those rumors too about Tesla stealing employees from Apple all the time.
Lewis: Like, "Hi guys we just bought you."
O'Reilly: Welcome back.
Lewis: "Oh there's Jim again, look at that."
O'Reilly: Not likely, but fun to think about. Next one that the FBR note listed was Adobe.
Lewis: Yeah, and I kind of want to lump Adobe and Box in together here just because ... So again GoPro is really the only one of these four that moved on this news. Adobe was actually up 4% before we started taping the show, when I checked this morning.
O'Reilly: Because of this note?
Lewis: No, had nothing to do with the note.
O'Reilly: Okay, I was like, what?
Lewis: They reported sales and earnings delivered solid sales and surprised by like $0.02 per share on earnings. So analysts were pretty happy with that. That's what that uptick is.
O'Reilly: Surprising the price of sales multiple on these guys though.
Lewis: Yeah Adobe, a market cap of $45 billion, price of sales 9.7. Again that would make it a pretty rich target for Apple to go after. Box, much cheaper and also much smaller in their footprint. Market capital $1.6 billion, price of sales at 5.6. Didn't move at all in the news.
Both these companies here, Box and Adobe, would be kind of enterprise segment plays for Apple. You know it's one of the things we talked about when we did our earnings update on Apple was, oh Apple's got this like surprise ...
O'Reilly: Enterprise business that nobody talks about.
Lewis: ... a surprisingly big enterprise business that no one talks about. And the play with Box would be enterprise storage. To me it seems a little weird that Apple would acquire someone in the cloud storage space when cloud storage is not a very lucrative business to be in. It's something that you kind of offer to build out your platform and make your offering more robust. And given that ...
O'Reilly: Also given Apple's cash hoard and the market caps that we're talking about, and the army of tech people that are there in Cupertino. I have to think they could replicate a lot of this on their own.
Lewis: Yeah and also when you're thinking about building out a platform, so like what Amazon does with its Prime where they make cloud storage available or obviously what Apple does with iCloud, you don't need to acquire customers from people that are loyal to this one service already. You already have the brand name, you just need to build out the offering in your existing product. So it's not a customer acquisition either.
I think Adobe would kind of be more of a proclivity play. They have a lot of applications that are focused on documents and marketing. So it would be just kind of handling that kind of stuff from an enterprise perspective.
I don't know if I really buy that one either, particularly like we talked about with the market cap being what it is and its price of sales being what it is. It seems like a very rich acquisition and I'm not really seeing that one either for the time being.
O'Reilly: Okay. Well before we move on, I wanted to make our listeners aware of a newly redesigned Focus.Fool.com. There you'll discover a special offer to join the Motley Fool Stock Advisor newsletter for all Industry Focus listeners. All loyal IF listeners have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. Just go to Focus.Fool.com to take advantage of this offer. Once again that is Focus.Fool.com.
Alright, so Dylan we talked about these three or four potential acquisitions. We probably should've talked about the prospects of buying the Federal Government of the United States, but maybe that'll be the show next week.
How does this fit in to what we've seen from Apple? Because if memory serves, they kind of just buy patents and tech, not really products.
Lewis: Yeah. I think that's always really telling, right? You look at a company's acquisition history -- generally what they tend to do with their capital -- and that generally tends to play out in the future, right? I mean people will surprise here and there, but I think Apple, it kind of has a very consistent march to what they do with their acquisitions. And so it also, that's another reason I'm kind of bearish on acquiring any of these four companies. It's just really not consistent with what they've done in the past. So Apple, they typically acquire these small tech companies that have weird names, and they do it for a value, so where ...
O'Reilly: Dylan Lewis -- calling it like he sees it.
Lewis: ... in like the 7 to 8 digit range. That tends to be the value of the acquisitions.
O'Reilly: So we could start a tech company, give it a weird name, and sell it to Apple. Perfect.
Lewis: O'Reilly Lewis Enterprises.
Lewis: It's something like that. And then what they typically do is take them and plug them into in-house initiatives which is easy. You don't have these, I think one of the things we've talked about in the past with some of the huge mega mergers in tech is it's really tough to realize the synergies you think you're going to realize.
O'Reilly: Not only that, but merging cultures particularly in tech.
Lewis: Very difficult.
O'Reilly: I've never done it because I'm 30 and working with Motley Fool, but I'm going to say it borders on impossible.
O'Reilly: Especially with a company like culturally, like Apple.
Lewis: Yeah and you wind up with a lot of extra employees. It's like what do you do with all these people? There's definitely some duplication there of efforts and the way that they've gone about acquisitions in the past is kind of managed to avoid a lot of that. I don't really see that changing anytime soon.
O'Reilly: So what are some previous acquisitions?
Lewis: Yeah previous acquisitions within the last year or so, they acquired Faceshift. It's a company that creates and animates avatars of people's faces in real time. Kind of interesting.
O'Reilly: Have you ever done that?
Lewis: I have not. Perceptio, a company that uses AI to classify photos on smartphones. VocalIQ, it's an AI start-up focused on context derived meaning for voice commands. And I think something that you see kind of consistently throughout these is the, they're not themselves something that you can immediately offer to consumers, but there's something that plugs into ...
O'Reilly: Something that Apple does.
Lewis: Something that they're working on, right? I mean like VocalIQ obviously has Siri implications. That's a very clear plug and play there. And something that's been consistent with all of these acquisitions and if you read the news items that follow them, the PR releases, there's always this line from an Apple spokesperson, "Apple buys smaller technology companies from time to time. And we generally not discuss our purpose or plans." That is like the boilerplate ...
O'Reilly: In every single one?
Lewis: Yeah it's like every single one. And that's just the comment that they give whenever they're reached out by journalists.
O'Reilly: Only Apple could put out that disclosure.
Lewis: And that's just their angle and that's what they do. And aside from the Beats acquisition, was that a year an a half ago?
O'Reilly: You know what? I forgot about Beats.
O'Reilly: I said they never buy products, but I wow, I forgot about Beats. I can't believe that.
Lewis: So that was a $3 billion acquisition which is crazy compared to pretty much everything else they've bought in the last 5 years. But in a lot of ways that's kind of an easy transition for them. It's like Beats you can easily sell in the stores.
O'Reilly: And they want their flag in the music industry is what they want.
Lewis: Yeah and the Beats music platform was something that was very portable over to what they were doing with Apple Music and the roll-out they were trying to get into on the streaming side and more of a subscription service type model.
So I think even that kind of made sense, even thought the sticker price was a lot higher than what they're used to paying. That's the argument I guess with GoPro right now is it fits well into what they know well. But I still think it's a little bit too far removed from their core business for it to truly make sense.
O'Reilly: I almost think that Tesla would be more likely because the best argument that I've seen for Apple flirting with the idea of making a car or something is that's kind of the only industry that could move the needle for a $700 billion company.
Lewis: That's true. Yeah.
O'Reilly: I mean what else are they going to do?
Lewis: Yeah because that is a totally different deal.
O'Reilly: Bypass government? I keep saying that, I don't know why.
Lewis: But I think you're right. I mean it's like they would have to get into an entirely different product category really to grow dramatically. So I think you have a good point there.
O'Reilly: So bring it back around because this is the Motley Fool and we help the world invest better. What does this mean? Should I buy into this? Should anybody act on it?
Lewis: Yeah, I think this is speculation and nothing more than that.
O'Reilly: I'm so surprised.
Lewis: You look at Apple's cash hoard of $200 billion, you know like the $200 billion plus the off-sided number, it just invites this kind of speculation. I think at a certain point analysts get bored and they just want to have fun fantasizing about what this company might do. Maybe they'll acquire some small players here and there. I don't see any of these four companies being acquired by Apple anytime soon.
And you touch on this a little bit more in the CG show that you do with Vincent Shen where you talk about some of the big mergers. But those are announced and both companies are in talks at that point, right? Like if you're talking about the SABMiller one, or Green Mountain Coffee Roasters buyout, that occurred recently, these are pretty far along in the process and shareholders know what's going on.
O'Reilly: In situations like that, you see the words, "Already in advanced talk." This is a guy throwing darts at a board in his office over at FBR.
Lewis: Yeah and it's I think in a lot of ways, it's kind of unfortunate that stocks moved this much in this kind of news. Because to me it's nothing more than speculation. And I think that's something that's important for investors to keep in mind.
So if you already own GoPro ...
O'Reilly: Good for you.
Lewis: You're happy that it went up 10%. This is not a reason to buy GoPro on the talks that hopefully they get acquired by Apple. I remember I used to work at this investment firm and they had a mergers and acquisitions little side project and it was like they rung a portfolio for a couple customers. And it was a merger arbitrage basically. And so one of the guys I worked with referred to that strategy and just trying to play mergers and acquisitions generally as picking up pennies in front of a steamroller.
O'Reilly: You'll make your 5%.
Lewis: Yeah but you'll get slammed sometimes. And deals will fall through for a variety of reasons. You want to keep your investment decisions focused on business fundamentals, companies that you like for the companies that they are currently, and that they will be independent of being grabbed by somebody else.
O'Reilly: Awesome. Wise conservative words from Dylan Lewis.
O'Reilly: Awesome. Well thanks for your thoughts. We'll see you next week.
Lewis: Always a pleasure, Sean.
And as always people on this program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against those stocks. So don't buy or sell anything based solely on what you hear on this program. For Dylan Lewis, I'm Sean O'Reilly. Thanks for listening, and Fool on!
Dylan Lewis has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, Ambarella, Apple, GoPro, and Tesla Motors. The Motley Fool recommends Adobe Systems. 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.