Confirming earlier rumors, Apple Inc. (AAPL) bought Israeli flash chip-maker Anobit Technologies Ltd. on January 6. According to Bloomberg, Apple dished out $390.0 million for Anobit, less than the rumored figure of $400.0 to $500.0 million. However, Apple declined to disclose any further details about the transaction.
The acquisition is in line with Apple’s strategy of acquiring small start-ups, which have historically been quintessential for its business growth. Traditionally, Apple has focused on acquiring software-based companies. This is only the third hardware company that Apple acquired in its history; the other two being P.A. Semi in 2008 and Intrinsity in 2010 for $278 million and $121 million, respectively.
Other than the supply of flash storage solutions, Anobit also offers Memory Signal Processing (MSP) technology, which improves the performance of flash storage products and systems and also makes them cost effective. Apple already uses Anobit chips in its iconic iPhone, iPad and MacBook Air devices. Anobit also supplies flash chips to Samsung and Hynix. Incidentally, Hynix is one of the main flash memory suppliers for Apple's iPhone 4S.
The acquisition will enable Apple to boost the memory volume. It is also expected to boost performance of its devices going forward. Moreover, the MSP technology acquired by Apple is expected to differentiate its devices from competitors such as Samsung. Therefore, there is a possibility that Anobit will stop supplying chips to Samsung, which would strengthen Apple’s position versus one of its key competitors in the smartphone segment.
Most importantly, we believe that the Anobit acquisition facilitates the in-house chip procurement process for Apple, which will significantly lower costs going forward. We note that the demand for Apple’s devices generally rise when it launches a new upgrade and during the holiday seasons. However, it is very difficult to estimate this sudden increase in demand. We believe that the in-house development process will help Apple meet the sudden surge in demand for its popular devices going forward.
We believe that the acquisition will not only provide Apple a talented workforce but could also lay the foundation for future research & development activities in this low-cost region.
As we believe that Apple’s ability to spur the popularity of its products in developing nations, where pricing is often an important consideration, will go a long way toward deciding the company’s future growth, setting up local research & development facilities will help the company to maintain its margins over the long term.
Recommendation
Apple has been a leader in the technology space and has always wooed its investors with its innovative product line. We believe that Apple remains the biggest growth story in the tech industry primarily attributable to its superior product pipeline, Apps, iCloud, the upcoming iPad update, the loyal customer base and international expansion going forward. Moreover, strong holiday season sales will drive upside in the near term.
However, stiff competition from Samsung and Google Inc. (GOOG), the overcrowding in its major markets and increasing legal complexities are the main concerns. We also believe that Apple’s secretive approach makes it very difficult to assess the company and this lack of visibility induces us to remain on the sidelines.
We maintain our Neutral recommendation over the long term (6-12 months). Currently, Apple has a Zacks #2 Rank, which implies a Buy rating in the near term.
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