acquisition

Investors Want Apple to Do a Big Acquisition, JPMorgan Says

Photograph by Daniel Leal-Olivias/AFP/Getty Images

Text size

JPMorgan believes investors are looking for Apple (ticker: AAPL) to use its $130 billion hoard of net cash to acquire a company.

While the firm’s analyst Samik Chatterjee noted Apple’s impending moves to introduce video-streaming and news subscription services, he added the market likely wants something bigger.

“Apple gearing up for Services push organically; however, we believe investors are looking for inorganic acceleration” in services, he wrote on Wednesday. Investors “are hopeful [recent management changes] will trigger progress towards leveraging the balance sheet for M&A.”

In a recent episode of The Readback, Alex Eule is joined by Barron’s tech reporter Tae Kim to talk about how Apple lost its way and where it goes from here. You can sign up for the podcast in iTunes or wherever you listen to podcasts.

Apple stock was 0.5% higher early Wednesday at $171.83. Chatterjee reiterated his Overweight rating and $228 price target for the shares.

The company didn’t immediately respond to a request for comment.

Chatterjee said an acquisition could accelerate Apple’s transformation to become more a services-focused company, which could help smooth out financial swings from a more slowly growing market for iPhones.

This isn’t the first time the analyst has broached the topic. Earlier this month, he suggested Apple should look at the video-streaming content, videogaming, and smart-home-speaker markets for its next big deal.

CEO Tim Cook reminded investors in a letter last month that Apple’s goal is to be “net-cash neutral” over time, meaning that the company needs a use for its cash.

Concerning Apple’s key smartphone business, the analyst also noted that a JPMorgan index of sales at suppliers of iPhone components showed signs of stabilizing in January. The suppliers’ revenue rose 2% year over year last month versus a 4% decline in December.

Write to Tae Kim at tae.kim@barrons.com

Apple's Pullstring acquisition is a benefit to Siri services

This story was delivered to Business Insider Intelligence Apps and Platforms Briefing subscribers hours before appearing on Business Insider. To be the first to know, please click here.

Apple reportedly agreed to acquire AI startup PullString, according to Axios. PullString specializes in helping brands and agencies build conversational voice apps for Amazon's Alexa and Google's Assistant voice platforms.

Business Insider Intelligence

While Apple hasn't formally announced the acquisition — and how it plans to integrate PullString's tech — we believe PullString could help fuel Apple's Siri efforts, helping the voice assistant catch up to the rest of the industry. Here's how:

PullString is entrenched in the voice app space, which Apple has yet to invade. Apple doesn't have a voice-specific app ecosystem for Siri, like Amazon and Google do for their respective assistants. Instead, Siri currently taps Apple's existing ecosystem of over 2 million iOS apps via Siri Shortcuts. Apple could leverage PullString's know-how, along with its existing iOS developer community, to accelerate the launch of a robust voice app ecosystem exclusively for Siri. Opening Siri up to developers is crucial because Alexa's and the Assistant's platforms are currently the go-to for companies looking to craft voice apps.

Existing Apple hardware could benefit from PullString's tech. Apple has integrated Siri into the iPhone, Apple Watch, Apple TV, Mac, AirPods, and HomePod. But Siri's limited capabilities — largely due to its lack of voice apps — across all of Apple's hardware aren't helping to drive purchase decisions, like Alexa and the Assistant do for Amazon's and Google's smart speakers. In fact, most Apple users who own a smart speaker opt for Amazon's Echo lineup or Google's Home series. Additionally, early iPhone X adopters cited Siri as the device's only weak spot (see chart, below). If Apple doesn't expand Siri's abilities and open it up to developers with the help of PullString, it will likely further impact sales of Apple's existing hardware.

Future iterations of Apple's Siri will need PullString's tech to succeed in emerging domains. As Apple aims to expand its presence in the car and smart home — areas that primarily rely on voice for control — it will need to enhance Siri's abilities to ensure its voice assistant is a top choice for device manufacturers.

The acquisition reflects Apple's overarching efforts to shift away from an iPhone-centric company into one where growth is driven by services and technologies.PullString's portfolio meshes well with Apple's aspirations to expand its services, especially in regard to AI and Siri, as it aims to reduce its reliance on the iPhone.

iPhone revenue fell a striking 15% year-over-year (YoY) to $52 billion in Apple's fiscal Q1 2019 (ended December 29, 2018). Consequently, the iPhone's share of Apple's overall revenue declined 8 percentage points YoY to 62% during the quarter.

At the same time, if Apple opens up Siri's voice app platform, it could have a massive impact on adoption of voice apps, in part due to the "Apple effect." The Apple effect is the noticeable uptick in device and tech adoption whenever Apple launches a new iteration of existing technology — such as the Apple Watch in the smartwatch market.

Although voice app adoption has been relatively slow to begin with, Apple's influence could be the catalyst that tips consumer adoption.

Instructure Announces Solid Earnings and an Acquisition

These days, every subindustry needs a software-as-a-service player. The business model is powerful, and the long-term economics are an investor's dream. The education sector has a bona fide leader in Instructure (NYSE: INST). The company has a cloud platform for educational institutions, called Canvas; a tool to measure student progress in real time, called Gauge; a platform for employers to educate their workers, called Bridge; and a video-based learning tool, called Arc.

Fourth-quarter earnings showed solid growth on the top line and a new acquisition. But most importantly, the company showed remarkable leverage, giving investors hope that profitability may come sooner than expected. 

Illustration of teacher conducting online learning session

More

Image source: Getty Images.

Instructure earnings: The raw numbers

Let's first look at how the company performed during the fourth quarter from a high level.

Metric Q4 2018 Q4 2017 Growth Revenue $56.3 million $44.8 million 26% EPS* ($0.01) ($0.20) N/A Free cash flow ($22.4 million) ($30.0 million) N/A

Data source: Instructure. *EPS presented on non-GAAP basis.

Recurring revenue, which backs out the low-margin service revenue that comes from onboarding schools and companies to Instructure's cloud, also grew 26% to $51 million. 

What's really impressive is this: While revenue grew 26%, operating expenses grew just 7%. Under the guidance of new CEO Dan Goldsmith, Instructure has been focusing intently on streamlining spending decisions and cutting costs. Those decisions have obviously paid off. Sales and marketing spending, for instance, grew just 8% after backing out stock-based compensation, which demonstrates impressive leverage in getting customers in the door.

One area to keep an eye on is research and development spending. R&D increased just 1% from last year. While cutting expenses is good, shareholders don't want to see Instructure trading in future growth potential -- which needs R&D dollars to develop -- for short-term profitability boosts.

That said, Goldsmith outlined major growth initiatives for the year ahead that will no doubt help address those concerns. More on that in a moment.

Perhaps most important was that net revenue retention remained above 100%. What that means is that schools and companies that sign on to Instructure's platform are staying with it. It is sticky and reliable, and represents a growing moat around the company.

What else happened during the quarter?

While this won't be an exhaustive list, Instructure announced a number of customer sign-ons of note. For the Bridge platform, these included:

Software company ETQ, which will use Bridge to help train over 100,000 customers.

Pet-supply company Chewy, which will use Bridge Learn for over 10,000 employees. 

Pacific Financial, which signed on to use Bridge Learn and Practice for 3,000 representatives and clients.

Harvard Medical School, which will use Bridge Practice for training in clinical research programs.

The Canvas platform also announced a number of new customers, including:

The University of California-San Diego and its 34,000 students.

Tecnologia de Monterrey in Mexico and its 200,000 students.

Two Australian colleges with a combined enrollment of 80,000 students.

Our Lady of Fatima in the Philippines, with over 70,000 students.

Management made it clear, however, that new customer bookings for Canvas in the United States were getting harder and harder to come by as Instructure grabs more of the market.

Instructure also announced that it will acquire Portfolium. The company has been a partner of Instructure's for a number of years, so the two know each other quite well. Portfolium focuses on showcasing student work through an "ePortfolio" network. In plain English, it's a more comprehensive way of demonstrating what a student is possible of beyond just grade point averages or test scores.

The deal has yet to officially close. But when it does, Portfolium will bring along the 4.6 million students; 40,000 educators; 3,600 high schools, colleges, and universities; and 200-plus partner institutions it works with.

Story continues

Looking ahead

Goldsmith teased that the company has six major growth initiatives to tackle in 2019. He was willing to share only three of them.

Continuing to drive the connection between the education and professional worlds. Portfolium is the linchpin of this strategy.

An analytics, data science, and artificial-intelligence (AI) tool dubbed DIG. While details were scant, Goldsmith said by using the data Instructure has collected and feeding it through AI, DIG could potentially double the company's total addressable market in education.

Two new products for Bridge, which has already added a number of new products over the past two years. No details about the two products were given.

And if you want hard numbers, Instructure provided the following guidance for the quarter and year ahead.

Time Frame Revenue (Midpoint) EPS (Non-GAAP Midpoint) First-quarter 2019 $57.2 million ($0.15) Full-year 2019 $258 million ($0.62)

Data source: Instructure.

To put these figures in perspective, first-quarter and full-year revenue are expected to grow by 19% and 23%, respectively. First-quarter earnings, on the other hand, are expected to show losses that narrow by 30%,  while full year losses will essentially be the same.

More From The Motley Fool

Brian Stoffel has no position in any of the stocks mentioned. The Motley Fool recommends Instructure. The Motley Fool has a disclosure policy.