Apple’s Rumored Beats Deal Gets No Love From the Street

Source: Thinkstock

Source: Thinkstock

Apple’s (NASDAQ:AAPL) rumored bid for premium headphones maker Beats Electronics has Apple bulls and bears alike scratching their collective heads today. The story was first reported by the Financial Times on Thursday night after the markets closed and was affirmed by other media outlets on Friday. According to unnamed sources cited by the Financial Times, Apple is close to finalizing a deal that would allow it to acquire Beats for $3.2 billion. The rumor appeared to be confirmed when a video of Beats co-founder Dr. Dre seemingly celebrating the deal emerged on social media, reports 9to5Mac.

However, the Street was in a decidedly less celebratory mood over the news of Apple’s potential acquisition. Piper Jaffray analyst Gene Munster, who remains bullish on Apple with an “Overweight” rating, called the deal “a bad idea” in a research note released to investors today. “We are struggling to see the rationale behind this move,” wrote Munster in a note obtained by Barron’s. “Beats would of course bring a world class brand in music to Apple, but Apple already has a world class brand and has never acquired a brand for a brand’s sake (i.e., there are no non-Apple sub-brands under the company umbrella). Separately, we are not aware of any intellectual property within Beats that would drive the acquisition justification beyond the brand.”

On the other hand, Munster thought that the Beats co-founder Jimmy Iovine would likely be a boon for Apple’s overall content strategy. However, the Piper Jaffray analyst also noted that “$3.2 billion is a steep price to bring on one high-level executive.”

William Blair analyst Anil Doradla, who has an “Outperform” rating on Apple shares, was similarly puzzled. “If the acquisition were to turn out to be true, we hope management will give a convincing rationale to the Street,” wrote Doradla in a note seen by Investor’s Business Daily. “We do not believe the consequences of this acquisition will be material to Apple.”

Like Munster and Doradla, Wells Fargo analyst Maynard Um struggled to find a rationale for Apple’s acquisition of Beats. While Um believes that Apple is really after the company’s music streaming service, he noted that Beats Music still “lacks the scale” to be worth $3.2 billion as either a “cross-platform for an ad business” or as a purely music subscription business. Um currently has a “Market Perform” rating and a valuation range of $515 to $585 on Apple shares.

Finally, BTIG Research analyst Walter Piecyk wrote that the size of the acquisition “will justifiably generate some questions for management and perhaps the Board of Directors to address if announced,” reports Barron’s. However, Piecyk also offered some reassuring numbers for investors that are worried about Apple squandering its cash hoard. “$3 billion is less than 2% of the company’s cash and less than 10% its annual free cash flow,” wrote Piecyk according to Barron’s. “So in the grand scheme of things, it’s not a deal that is going to have a material impact on results.”

While some analysts argued that the rumored Beats acquisition would actually be a positive step for Apple, overall skepticism about the deal was reflected in the Cupertino-based company’s share price on Friday. Apple’s share price dropped as low as $580.33 in trading on Friday before finishing the day down 0.42 percent, or $2.45, at $585.54.

More from Wall St. Cheat Sheet:

Follow Nathanael on Twitter (@ArnoldEtan_WSCS)