With Apple's troublesome fourth quarter in the rearview mirror, investors are turning their attention to how the tech giant should spend its cash.
It's time for Apple (AAPL - Get Report) to go shopping, wrote analysts at JP Morgan in a note to clients on Monday. The iPhone maker has around $130 billion to its name in net cash, analyst Samik Chatterjee noted, and a few areas of development in which a strategic acquisition would make sense given its push into services.
Past M&A speculation has bandied about names like Tesla or Twitter, but Chatterjee outlined three areas that would provide "potential growth opportunities to leverage services over a wider installed base," he wrote. In its recent earnings report, Apple disclosed to investors a global installed base of 1.4 billion devices, including 900 million iPhones in circulation, as well as gross margins of 62.8% within its growing services business.
One such category, according to the JP Morgan analysts, is smart home speakers -- an area in which Apple has notably lagged behind competitors Amazon (AMZN - Get Report) and Alphabet (GOOGL - Get Report) . Apple's Homepod hasn't made a significant dent in the market compared to Echo and Google Home, but an acquisition of a player like Sonos (SONO) could produce synergies with Apple Music, Chatterjee wrote: "Among targets mentioned in press reports, we find Sonos to be the best strategic fit due to its differentiated position as a premium home speaker system relative to Amazon Alexa and Google Home, strong loyalty among current consumers, and robust international presence," he said.
Another potential target, according to JP Morgan? Activision Blizzard (ATVI - Get Report) , a leading game publisher. While press reports have named Nintendo (NTDOY) , EA (EA - Get Report) and others as potentially fruitful acquisitions for Apple, Chatterjee pointed to Activision Blizzard as the best strategic fit, in part, because of its wider genre of games and greater percentage of mobile revenues relative to EA.
"Activision has a broader portfolio of games that it can potentially offer on mobile platforms in the future, offering opportunity for future growth in mobile gaming," he wrote.
Outside of gaming, video content is another area in which an acquisition to boost Apple's stature could excite many investors.
Given its leadership position in the market and bench of content talent, Chatterjee called out Netflix (NFLX - Get Report) as the target with the most strategic value for Apple -- though he noted that a deal is not likely given how such a high-stakes acquisition would transform Apple's balance sheet.
"If we assume Apple were to purchase Netflix for a 20% premium (Netflix is unlikely to be a seller, in our view, and might command a much higher premium), it would imply an enterprise value of $189 bn (Netflix has a net debt position of ~$7 bn), implying that Apple would likely end the year with a neutral cash position, which is a long-term target for the company," he explained.
If Netflix isn't especially likely, others have floated an acquisition of another major content player. In a recent note, Wedbush analyst Dan Ives called on Apple to snap up movie studio, or something of that ilk, to breathe life into its long-anticipated video streaming service. As Apple beats the drum of its growing services business, a meaningful acquisition in the content space would catalyze development and help to "ultimately launch a standalone streaming service by the end of 2019," Ives wrote.
Zev Fima, an analyst with Jim Cramer's Action Alerts Plus portfolio, added that Apple might leverage some of its cash to buy up assets in health care, a major area of interest for Apple. In a Jan. 9 interview with Jim Cramer, CEO Tim Cook said that health-related work would be Apple's "greatest contribution to mankind."
"I think increased share repurchase activity is certainly an option given their stated goal of being cash neutral over time, however, what I really want to see them do is an acquisition in the healthcare space," Fima said.
Cramer recently called out Epic Systems, a maker of healthcare software, as a potential acquisition target for Apple as it ramps up development of health and wellness-related initiatives. In September 2018, it unveiled heart-monitoring features for the Apple Watch and Cook has frequently teased future offerings in health.
"They want to democratize healthcare and be the company that seamlessly monitors and aggregates health records and user vitals, so the integration of iOS with Epic combined with the 24/7 monitoring capabilities of the Apple Watch is something I think can really be a game changer for the company," Fima added, also pointing out that Apple's positioning on data privacy could give them an edge in selling consumers (and potentially regulators) on a health care offering.
Apple's stock was up 2.24% on Monday.