Monday, February 11, 2013

How Apple Should Or Could Invest Its Cash - Buy Dreamworks Animation!

Apple Inc., the gigantic computer maker and inventor of the iPhone and iPad, along with the iMac, has about $137 billion in cash, due to its tremendous success in sales of its products and management of its assets. One huge asset that Apple can boast about that most other companies cannot: that it has over a billion dollars in cash. In fact, Apple has over 137 billion dollars.

Apple has recently been rocked with a falling stock price, in some part due to a perceived (or imagined and much hyped) decline in the popularity of its products. Shareholders, which include most large institutional shareholders, have taken notice, and many armchair stock gurus have  jumped in with their prescriptions for what can turn Apple around. I do not agree with most of the things that I hear, but I think that it is good that Apple is going through this kind of thing right now: good for investors, and good for Apple. It's good for investors who have cash, because at this price level and given its fundamentals, people would have to be idiots to buy almost any other stock. Cash is still King, after all. It also presents Apple with the opportunity to buy more shares in its buyback program, which it is doing.

Recently one prominent Apple investor filed a lawsuit against Apple to force it to do something with its cash besides banking it. This is also good for shareholders. It has been suggested that Apple use its cash to buy a complimentary company. One name that has been bandied about often in the media today as a great buy for Apple is Netflix. After all, Netflix is on every smart phone, computer, tablet designer and gaming console's mind when they design their new products. Netflix has such a great user interface that, in my opinion, no other carrier could duplicate the quality without some kind of infringement (although lately big companies seem to get away with infringement- look at what Samsung did to Apple). Netflix does have huge name-brand recognition, and they provide a service which, in my opinion, is a huge value for the $7.99 per month that one pays for streaming video. A month ago, Netflix would have been the best investment in the world for anyone (since their stock price doubled since then, based on earnings of $9 million and a report of a growth in subscribers). One of Netflix's competitors, Hulu, is so desperate that they have matched Netflix's price for Hulu Plus, and you cannot even go to Hulu's website on a tablet now without immediately being redirected to sign up for Hulu Plus (without even being able to peruse some sample titles). Netflix currently has a market value of just under 10 billion dollars at today's stock valuation, so Apple could definitely afford to make a move. I imagine that an offer of at least 30 percent over the current market price of the stock would be accepted. In addition to its great technology, Netflix is also a movie and television production company. Netflix might be a great investment for Apple, but it might not be a must-buy. There are other great companies that Apple could buy. For example, Disney has a market cap of under $100 billion, and Apple could buy that, too if it wanted (or they could merge the companies). Apple has the cash, and he with the cash has options.

Another company that I see as a great purchase opportunity for Apple (or for Disney) is Dreamworks Animation. It has a market valuation of under $2 billion, has long-term debt of only $200 million, has $137 million in cash, is profitable, has several of the highest-grossing movies of all-time, has recognizable characters, including Shrek, and, like Pixar, has a proven track-record of making great, profitable animated films (I heard that Rise of the Guardians lost money for the Company, but I also heard that it is one of the best movies from last year that I have not seen).

I have heard that the founders of the company, David Geffen and Jeffrey Katzenberg, are still major shareholders in the company and that despite the stock being a public company, they together still control 70 percent of the company's voting, and any deal would have to be approved by both of them.  Last year Dreamworks Animation acquired Classic Media Inc., which owns the rights to several classic television cartoons, including Rocky and Bullwinkle.  I was at Costco yesterday and noticed that Classic Media just released the old Jackson 5 TV series on Blue Ray, and it was on sale there for $22.00.  I almost bought it!  Dreamworks Animation has plans for the future, including building a theme park in China.

Dreamworks Animation has fallen out of favor with Wall Street it seems.  People who owned it when I was looking at it at $30 per share who have held onto it must really hate it now that it dipped below $16 a share today.  However, to some fresh, unbiased eyes, this company looks like it could be ripe pickings for either Disney or Apple.  Disney is headquartered in Burbank, CA, but has holdings in nearby Glendale, where Dreamworks is located.  Disney right now distributes films for Dreamworks Pictures.  Bob Iger, Disney's chairman (who also sits on the board of Apple) likes to buy attractive deals for low money- Iger could buy this company for less than what he paid for the Star Wars franchise and for half of what he paid for Pixar).  Apple could even do a joint venture with Disney on this one, with each buying a stake in Dreamworks.  NBC Universal ( a division of Comcast Corp) uses some of the Dreamworks characters in its theme park attractions in Hollywood and Orlando, and could also benefit from purchasing Dreamworks.  It's a slam-dunk, no-brainer at the current price.   You watch, somebody's going to make a bid for this company soon!  Any of these 3 companies that I have mentioned could buy Dreamwork Animation, but Apple might have the easiest time of it.

For Apple, buying Dreamworks Animation (or at least investing in them) would definitely shut up (at least temporarily) some of Apple's critics. I cannot see a downside to it (other than it might mess up its relationship with Disney, which has a value all its own).  The bottom line, Apple could buy any of the other companies that I have mentioned here if they really wanted to, but perhaps these very smart folks in Cupertino, CA have some secret plans that none of us can figure out- a clear path that will cause all jaws to drop when revealed,  part of a hand that Steve Jobs and his inner circle have never shared with anyone before, and maybe all that cash is needed for that purpose.  We will see......