Wells Fargo Comments on Apple's Beats Acquisition - Apple (NASDAQ:AAPL)

In a note released Thursday, Wells Fargo analyst Maynard Um weighed in on the deal for Apple Inc.

AAPL

to acquire Beats Electronics. Wells Fargo currently rates Apple as Market Perform with a valuation range of $515-$585. Um began the note by stating, "While we believe Apple should get some benefit of the doubt because of its historical success, a music related acquisition still seems, to us, more defensive," he continued, "we believe Apple should be acquiring more offensive assets to better position itself." Looking to explain why Apple may have sought this deal, Um provided a list of possible benefits the company could receive.

Beats offers an entry into the premium headphone market, which is congruent with Apple's premium product strategy. However, Um worries this may place to much focus on near-term rather than long-term strategies.
Um suggested this may signal an attempt from Apple to "build scale through cross-platform for an ad business". He sees this as being more in line with his view of the future, but said, "frankly, driving apps for plain old in-app banner ads is not the differentiation and innovation we expect Apple to bring to this model."
Um noted that Beats has recently allowed users to subscribe through iTunes and suggested Apple may see the opportunity for "strong growth". However, he believes Beats lacks the necessary scale and has questioned the valuation.
The deal includes Jimmy Iovine and Dr. Dre joining the Apple team which may provide the company access to notable intellectual property and music industry contacts, but Um again questioned such a high valuation for these reasons.

Amid the news of this deal Apple shares were trading up just under 1 percent at $628.24 at last check.

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