Apple (APPL US) share price dropped almost 10% post its profit warning, blaming the shortfall on China. Even though China and the current trade war is having its toll, most investors are worried for different sets of reasons. Investors are concerned that Apple is just a one product company and that product is the IPhone. We wrote about this late last year;
Consumers are less inclined to pay for expensive smartphones. U.S-China trade-war would further increase smartphone price
If the upgrade cycle of smartphones have reached its peak, continued growth for Apple will have to come from other verticals such as services. With that said, service revenues are still less than 15% of total sales. Another path forward for Apple is conduct M&A. With over $200bn in cash, Apple is in the position to be able to buy almost any company it wants.
The obvious m&a candidate is Netflix (NFLX US). It would dramatically expand its service segment. Apple is in the process of expanding its own media offering, and Netflix has just like Apple a global presence. It would also strengthen the Apple’s “ecosystem”, locking in customers and users even more into Apple system.
For Netflix the global media landscape have changed as well. It has no longer its first mover advantage. Its key content providers such as Disney (DIS US) or AT&T (T US) owned Warner Media (owns HBO) are all launching their own streaming platforms. As Netflix faces more and more competition from its content providers, it finds itself between a rock and a hard place. Ampere estimates that only 8% of all Netflix content is original content. Loss of other content could have severe negative effect on them. Recent payment of $100m to keep TV show Friends for another year is clear indication of Netflix dependence on non-original content.
Beyond competition from content providers such as Disney, Amazon (AMZN US) is another cash-strong competitor. Netflix recently raised its content budget by 50% to $12bn to fight back against all these competitors. All this spending have resulted in about $3-4bn in negative CF and net debt of over $8bn. There is no end in sight when Netflix will be CF positive for that matter. All these headwinds will become more and more challenging going forward.
For Apple, all of this provides an opportunity as they are about to launch their own streaming service. They would get access to a global subscriber base of over 150m subscribers, with all the data Netflix have gathered over the years. Furthermore Apple would get access to subscribers and customers in emerging markets such as India were they currently are lacking.
For Tim Cook and Apple, the writing appears to be on the wall. IPhone growth seem to have stalled. Most likely the next step would be declining margins for selling the phones. Subsequently, they need to make some type of drastic change to avoid becoming another consumer hardware company with much low margins. Netflix or similar company could be an interesting target.
