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Apple Inc. (AAPL - Analyst Report) recently announced its decision to take over Israeli company PrimeSense Ltd. for approximately $350.0 million. PrimeSense developed the motion tracking chip technology, specifically used by Microsoft (MSFT - Analyst Report) in its Kinect game console.

PrimeSense received funding from investors such as Canaan Partners, Silver Lake, Gemini Israel Funds as well as Genesis Partners. This helped the company to extend its technology beyond gaming, and helped it to develop a new depth-sensing technology. This technology helps mobile phone 3D cameras to enable apps like indoor navigation tools or 3D shopping catalogs.

Apple pursues an innovative acquisition strategy, whereby it buys small technology firms which help it to grow inorganically. We believe that PrimeSense’s technology that enables digital devices to detect movements and objects, which are then graphically represented in different colors, which will find a place in Apple’s future products.

Moreover, this acquisition will give Apple the opportunity to utilize some of its cash reserve effectively.

We believe this is a win-win situation for both Apple and PrimeSense, as Apple would be able to access a new technology, while PrimeSense would get the support of a sector behemoth such as Apple.

Apple is facing significant competition in most of the markets from Google’s Android operating system. The company continues to lag Samsung in worldwide smartphone shipment. As per data available from IDC, Apple had 13.0% market share compared with Samsung’s 31.0% at the end of the third quarter of 2013.

We believe that acquisitions like these will help Apple to add new features to its already popular iPhone series, which will inturn help it to justify its pricing.

The significant decline in revenues in the U.S and Rest of Asia suggests market share loss to low cost smartphones and tablets produced by Samsung, HTC, LG, Huawei and Amazon (AMZN - Analyst Report). Besides Samsung, we expect Apple to face stiff competition from Microsoft in the U.S. smartphone market going forward.

Currently, Apple has a Zacks Rank #3 (Hold).

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