Apple Should Break Out of Its Comfort Zone With Bold M&A

With a sluggish product pipeline and an enormous cash hoard, it might be time for a deal.

Apple reported revenue of $124 billion for the December quarter, (Bloomberg)

Apple Inc., the iconic company whose products have transformed daily life, has done what was once unthinkable: It has become humdrum. 

On Thursday, Apple reported revenue of $124 billion for the December quarter, beating the $119 billion median estimate of analysts surveyed by Bloomberg. Net profit for the quarter also came in above the consensus.

Yet underneath those solid results are hints of stagnation. Growth is slowing markedly. Sales growth decelerated from a 29% year-over-year jump in the three months ended in September to 11% for the December period. On the earnings call, Apple told investors to expect a further softening in the current quarter. And for now, there don't seem to be exciting products in the pipeline that could reverse the trend.

At the moment, the company's biggest anticipated innovation is a design change on the next iPhone that replaces the ugly notch on top of the display with a smaller hole-punch or pill-shaped form. Not exactly earth-shattering stuff, especially because Android phones such as the Samsung Galaxy already have this feature. 

Apple at its core still relies heavily on its smartphone business, with the iPhone accounting for just more than half of the company's revenue. Services from the App Store to Apple Music also depend on vibrant hardware sales. Meanwhile, game-changing projects such as the development of a self-driving car and an augmented reality headset are continually being pushed back. Apple's last significant product release, the Apple Watch, came out nearly seven years ago.

Fortunately for Apple, there is a way out of these doldrums. With the $34.6 billion net profit in its latest quarter, it now has about $200 billion in cash, more than any other publicly traded U.S. company. Apple Chief Executive Officer Tim Cook could put some of that cash hoard to work by making some strategic acquisitions.

Over the past couple of years, there has been an assumption that megadeals were off the table for large technology companies in the current political environment. That belief has been thrown into question after Microsoft Corp. announced plans last week to buy Activision Blizzard Inc. for $69 billion. If federal regulators don't block Microsoft from buying the largest publicly traded U.S. video game publisher, it might make companies like Apple less shy about doing their own M&A.

With its resources, Apple can certainly take the risk to transform its business and expand its capabilities. Among the targets Apple could consider are a wireless carrier like T-Mobile US. Inc.; an entertainment conglomerate like Walt Disney Co; video game maker Electronic Arts Inc.; streaming leader Netflix Inc.; or high-end fitness company Peloton Interactive Inc.

Historically, large M&A hasn't been Apple's style. It has opted instead for tuck-in acquisitions including Beats Music in 2014 and chip designer P.A. Semi in 2008. Now might be a good time to change tactics.

Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.