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3 Acquisitions That Would Immediately Change Apple's Valuation Debate

Summary

Despite pleading by analysts and Carl Icahn, investors aren’t going to suddenly start valuing AAPL differently.

But with ~$200 billion in cash, AAPL can force investors to view and value the company differently.

Acquire FIT to dominate the $70 billion wearables market.

Acquire PAY to vertically integrate and dominate the $210 billion U.S. mobile payment market.

Acquire WATT and Ossia (private) to dominate the IoT market.

Michael Santoli didn't waste any time after our panel discussion on CNBC's Closing Bell last week to chide Drexel Hamilton analyst Brian White - again - for suggesting investors need to "look at Apple (NASDAQ:AAPL) through a new lens" and value it appropriately.

I agree wholeheartedly and said so later in the segment.

You'll recall, billionaire Carl Icahn peddled a similar line of reasoning to White's in early 2015 to no avail. In an open letter to Twitter (NYSE:TWTR) followers, he wrote:

It seems to us that the market is somehow missing a very basic principle of valuation: When a company's future earnings are expected to grow at a much faster rate than that of the S&P 500, the market should value that company at a higher P/E multiple.

On the surface, White and Icahn's argument sound logical. The only problem? In Apple's case, reality trumps logic.

Apple has grown earnings faster than the market for years. Yet the stock has seldom commanded a premium market multiple. In fact, since the end of 2011, it has actually traded at an average discount of 23% to the S&P 500 P/E ratio, based on Morningstar data. And if we strip out Apple's cash, the discount is even more pronounced.

No matter how hard a sell-side analyst, and even a billionaire try, investors aren't going to suddenly start valuing Apple differently. Not in its current form.

So what would it take?

Armed with over $200 billion in cash, I can think of at least three moves the company could make to change the narrative and in turn, the valuation.

Move #1: Acquire Fitbit (NYSE:FIT) to own the wearables market from top to bottom.

The wearables market is on fire. In the third quarter, unit sales increased almost 200% to 21 million, according to IDC. No doubt, fourth quarter numbers will be similarly strong, thanks to the holiday shopping season.

There's no end in sight to the growth either. Gartner predicts the wearable tech market will expand at a compound annual growth rate of 49% through 2020. In terms of unit volumes, IDC estimates 72.1 million wearable devices will be shipped this year, rising to 155.7 million units in 2019.

Fitbit has benefited handsomely from this robust trend, commanding the majority of the market share. But let's be fair. It's done so because of a lack of any true competitors. That's no longer the case. In fact, as I've argued before, Fitbit is in jeopardy of becoming the next one-product tech wonder, a la GoPro (NASDAQ:GPRO). It would be wise to sell out to Apple at this point.

It's worth noting that Fitbit only sells basic wearables - a category that's expected to lose share over the next few...


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