Good Beats for tunes don’t make Apple a ‘buy’

Apple Inc. – both the business and the stock – has fanatically devoted fans, but Credit Suisse analyst Kulbinder Garcha is not among them.

His maintaining a “neutral” recommendation almost looks generous considering his 12-month target price is just $80.

Mr. Garcha provided an update after Apple acquired Beats Electronics and Beats Music streaming service for $3 billion. As Apple’s largest transaction to date, the deal is notable.

Even so, the analyst points out, it is “quite small” relative to Apple’s size and financial capacity.

The price tag represents less than one per cent of Apple’s annual sales, under 10 per cent of its annual free cash flow and less than three per cent of its cash on hand.

Why did Apple buy Beats? Mr. Garcha highlights three reasons. First, Apple itself is framing the deal as a way of moving further into the music industry.

For quite a while now, the company that Steve Jobs built has been working to place itself at what Mr. Garcha calls “the intersection of technology and content,” including music. Apple has pursued this via its Mac computers, iPod devices and iTunes service.

As the analyst notes, “the Beats music streaming business is perceived to have a head start” on its competitors “in terms of its all-round experience”.

The second reason for the deal is that it gives Apple new talent. Beats’ founders and famed musical producers Jimmy Iovine and Dr. Dre will join Apple with a mandate of helping the company innovate.

Third, Apple has gained a fast-growing, high-margin headphone and speaker business.

At least, this is how Apple has pitched the deal. By contrast, Mr. Garcha gives the transaction a mixed review.

On the positive side, he says it shows Apple applying fresh tactics to advance its portfolio of products and services.

Similarly, the deal indicates a new, open attitude to bringing in external talent which, he says, “may be key to stimulating innovation”.

Mr. Garcha also notes that the addition of the Apple brand and distribution network “should accelerate Beats’ growth”.

However, he also says the deal suggests that “Apple’s own foray into iTunes Radio may not be yielding the right results”.

Then again, if that’s the case, Mr. Garcha notes, the deal “shows pragmatism” on Apple’s part.

Still, in the analyst’s view, all of this is moot. Much more important than the Beats acquisition, he says, is the outlook for Apple’s iPhone business.

And he believes this “will struggle to show growth in coming years”.

 

Investor’s Digest of Canada, MPL Communications Inc.
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