Apple's cash hoard of $165 billion creates M&A mirages

The slowdown in Apple's growth and the company's cash-rich balance sheet is again fueling speculation that Apple Inc. ought to make a big acquisition as a result of its slowing growth.

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The entertainment giant Walt Disney Co. recently joined a long list of potential acquisition targets over the past few years, a list that has grown to include such companies as Netflix Inc., Tesla Inc., Peloton Interactive Inc., and Sonos Inc. There is one thing that all of these companies have in common: Anyone who bet on Apple buying them has so far been terribly disappointed.

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If you believe that the main catalyst for investing in a company is an acquisition of a large company, then we think you're missing out on a lot of the value of the business," Kevin Walkush, a portfolio manager at Jensen Investment Management, said. "This is a bet with a low probability of success."

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As a company that avoids splashy acquisitions, Apple is famous for not making the kind of splashy acquisitions that rival companies like Microsoft Corp. and Amazon.com Inc. tend to make, despite increasing scrutiny by regulators. Instead of making large investments in new markets, Apple prefers to purchase smaller startups as a way of augmenting its own moves into new markets, even if those efforts take many years to bear fruit. 

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Since Apple's shares are expected to outperform again in 2023, it is unlikely that the iPhone maker will be changing its strategy in the near future. There has been an increase of 25% in the stock price for the year 2023, outperforming its mega-cap peers for the second consecutive year. Since Apple has been in business, it has averaged an annual return of 39%, including dividends, over the past 25 years. Comparatively, the S&P 500, by comparison, sits at 10% of the market value.

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It was a negative day for the stock on Thursday as it fell 0.8%.

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"The fact that they did not do a big deal has not impacted them and if it ain't broke, don't fix it," according to Gregg Abella, chief executive officer of Investment Partners Asset Management, which holds the stock. "It is very pleasing to see Apple maintaining a high level of discipline in this respect."

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Among Apple's biggest acquisitions in its history, Beats Electronics and Beats Music have been its biggest purchases to date, which were acquired for $3 billion in 2014. Activision Blizzard, a video game maker known for its games, is being acquired by Microsoft for a reported $69 billion.

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Even though Apple's revenue growth is expected to shrink by 2% in fiscal 2023, it appears that the company will be spending even less on acquisitions than it has been in previous years. In fiscal 2022, the company spent $306 million on business acquisitions, down from the $1.5 billion it spent in fiscal 2020. In the most recent quarter that Apple reported its financial results, the line item for such activity was removed from its financial statements. 

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As opposed to splurging on deals, Apple returns most of its excess cash to its shareholders in the form of share buybacks and dividends, instead of splurging on deals. As of December 31, the company had a cash balance of $165 billion in cash equivalents, marketable securities, and cash equivalents of over $100 billion as of the end of fiscal 2022.

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Considering that Apple has been able to do so well by making smaller acquisitions that have provided incremental growth for the company, Logan Purk, an analyst for Edward Jones, believes that Apple would be uneasy about a larger deal. 

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It would scare me if Apple decided to do some major deal that was outside of its wheelhouse - something that would be complementary to what Apple does, but which would change its story entirely," Purk said during an interview. "The decision would be so far out of the normal course of action that you would have to ask why it would be made."

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The price targets for Meta Platforms Inc.'s shares were raised by more than two dozen analysts following Meta Platforms Inc.'s second round of layoffs in mid-March. In spite of this, analysts place the stock's return potential around 9.7%, which is well below its average return over the last five years of about 24%. Meta's stock prices have spiked almost 140% in the last seven months from a seven-year low in November after it announced it was cutting thousands of jobs as a result of falling sales.