An analyst's suggestion that Apple buying GoPro would fit the tech giant's strategic goals sent GPRO stock soaring 11.5% Thursday (yesterday).
It wasn't the first time someone had floated the idea of an Apple Inc. (Nasdaq: AAPL) deal for GoPro Inc. (Nasdaq: GPRO).
Back in September, Northland Capital analyst Gus Richard said, "GoPro would be an interesting acquisition for Apple from both a hardware, software and content prospective." That news lifted the GPRO stock price 12% over the following three days.
Yesterday it was FBR & Co.'s Daniel Ives who made a case for possible Apple acquisitions of Box Inc. (NYSE: BOX), Adobe Systems Inc. (Nasdaq: ADBE), and Tesla Inc. (Nasdaq: TSLA), as well as GoPro.
"We believe an acquisition of GoPro would make sense for Apple; action cameras are uniquely positioned at the intersection of Apple's smartphone, wearables, and multimedia offerings," Ives said in a research note. "Additionally, GoPro's new product cycles could open the door to areas where Apple's competitors are investing heavily (e.g., drones, VR), and Cupertino has been playing catch-up. We also see strategic value in GoPro being integrated with Apple's strong multimedia ecosystem (e.g., iTunes, Apple TV, etc.)."
The notion of AAPL buying GPRO definitely has merit...
Why It's Easy to See Apple Buying GoPro
Financially, an Apple acquisition of GoPro is no problem. GoPro has a market cap of just $2.5 billion. And even with a bit of a premium, any Apple-GoPro deal is unlikely to exceed $3 billion. That's about what Apple paid for Beats Electronics last year.
Apple, of course, is flush with cash. It has about $203 billion in cash and equivalents on its balance sheet.
Now let's examine some of Ives' points more closely.
Wearable tech: Apple has already ventured into the wearable tech arena with the Apple Watch. Research firm IDC estimates the wearable tech market will grow 173.3% in 2015 to 72.1 million units, and will grow at a compound annual growth rate of 42.6% over the next five years. Adding GoPro's popular wearable cameras would give Apple a bigger presence in this growth market.
And while many suspect Apple is already working on a wearable camera based on a patent filing revealed in January, buying GoPro would give any existing efforts a huge boost.
But while the wearable camera business is the most obvious reason for Apple to buy GoPro, these considerations are actually more compelling...
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The Best Reasons for Apple to Buy GoPro
Virtual reality: No one knows how far along Apple might be on a virtual reality platform, or if it's working on one at all. But just about every other big tech company is taking virtual reality seriously, including Microsoft Corp. (Nasdaq: MSFT) with its HoloLens and Facebook Inc. (Nasdaq: FB) with its purchase of Oculus Rift. Digi-Capital has forecast this market will grow to $120 billion by 2020, making it a place where Apple will want to be. In September, GoPro unveiled its Odyssey 360-degree camera, which means the company has virtual reality expertise that Apple could use.
Cloud-based video editing: One issue that has frustrated GoPro users is the ability to easily edit all the video they shoot. At the TechCrunch Disrupt Conference in September, GoPro CEO Nick Woodman said the company is getting close to releasing a cloud-based solution that will allow people to edit footage in minutes. Easy-to-use, cloud-based video editing has Apple written all over it. And the implications go far beyond GoPro hardware. Apple has millions of iPhone users who would love this ability.
A perfect fit for the Apple ecosystem: If this hasn't become clear yet, let's just say it: GoPro would both add to and enhance the already powerful Apple ecosystem of hardware, software, and services. And the ecosystem is the secret sauce that keeps Apple customers coming back. GoPro's hardware already integrates with the iPhone and Apple Watch. A cloud-based video editing service would give customers one more reason to buy Apple gear. And GoPro's virtual reality assets could add another dimension to Apple's ecosystem (both literally and figuratively).
Invaluable brainpower: The competition for the best and brightest is so severe in Silicon Valley that big tech companies will buy smaller ones just for the engineers. The practice is so common it has a name - "acquihire." GoPro has just the kind of hardware and software engineers that Apple needs and will need more of as it expands beyond the profit-pumping iPhone into new areas of growth.
So Apple buying GoPro is a good idea. But what does it mean for investors?
How Investors Should Play an AAPL-GPRO Deal
At the moment, Apple buying GoPro is pure speculation. Apple stock would benefit from a GoPro acquisition over the long run. But regardless, Apple is an incredible profit machine with lots of potential in front of it.
GoPro is a much different story.
GoPro has punished those who invested when it was a Wall Street darling one year ago. GPRO stock peaked at $93.85 in October 2014. Since then it's down 80%, trading today at about $18.50. Its IPO price was $24.
Money Morning Chief Investment Strategist Keith Fitz-Gerald never fell for the hype. He's been warning investors away from GoPro since August of last year.
"The company still has big problems, just like every camera company ahead of it, which means the company isn't worth what most investors think," Fitz-Gerald said.
Even if Apple is buying GoPro, Fitz-Gerald thinks GPRO is way too risky. He has a better way to play a possible AAPL-GPRO deal.
"If you're tempted to wade into GoPro, buy Apple instead," Fitz-Gerald said. "That's the stock nobody can stand to see go lower. And, by implication, the one with actual upside."
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.