Sorry, Cramer, Apple Should Definitely Not Buy Yelp for $75
Ever since reporting solid second-quarter earnings earlier this week, Yelp has been on a tear, gaining 23% the following day and enjoying gains as high as 12% today. Fueling the rally further is none other than Jim Cramer, who boldly proclaimed yesterday morning that Apple would acquire the review service for -- wait for it -- $75 per share!
Here's his initial thesis for such a premium price tag: "This is social. It is mobile. It is cloud. It is the Holy Grail Trinity of tech. Social, mobile, cloud."
Whatever that means.
Cramer predicts that Yelp will never become profitable, because the Mac maker will acquire it before it gets a chance to generate black ink. Speaking figuratively to Tim Cook, Cramer continues, "Mr. Cook, here it is. You get social, you get mobile, you already have cloud."
Presumably, Apple only has one element of said Holy Grail Trinity at present time.
Sadly for Yelp investors, this deal will never happen. Speculating on Apple acquisitions is a popular hobby among investors, and the proposed deal has all the typical surface signs that lead to speculation. Apple and Yelp are existing partners, with Yelp providing data for Apple Maps, and Apple could theoretically get something it wants by integrating the smaller company. The reality, though, is that Apple simply never makes big and flashy purchases.
At $75, Yelp would be valued at $4.8 billion. For perspective, that's nearly ten times the upper limit of what Apple pays for acquisitions. The Anobit acquisition in 2011 was upwards of $500 million, and the only reason that purchase was flashy was because Anobit specializes in flash memory.
Apple's acquisition strategy is to buy smaller companies with innovative technology that can be integrated into future products. Tim Cook has said flat out that Apple never buys revenue streams, and the company frequently shuts down an acquisition's core operations.
Yelp has generated approximately $178 million in trailing-12-month sales, so at $75 Apple would be paying 27 times sales for a company that inherently does not have innovative technology. Yelp has a strong brand position in consumer reviews and a growing user base, but Apple can get precisely what it needs by doing exactly what it's already doing: partnering with Yelp.
Hopefully, you already knew not to listen to Jim Cramer. If you didn't, here's another reason: Apple will never buy Yelp for $75.
Much of our digital and technological lives are almost entirely shaped by just a handful of companies like Apple and Yelp. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.
The article Sorry, Cramer, Apple Should Definitely Not Buy Yelp for $75 originally appeared on Fool.com.Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.