For years, the breathless speculation around
The discussion around Apple's automobile ambitions got a push forward this week when the Wall Street Journal reported the company is tripling the 600 people working on the project -- codename 'Titan' -- and targeting a 2019 "ship date." (See "Apple Aiming To Unveil Its First Electric Car In 2019.")
One thing that seems clear: a car project would soak up some of Apple's massive cash flow. The company has faced harsh criticism over the size of its piggy bank, first for not sharing the wealth with shareholders and more recently, after instituting a rising dividend and massive buyback program, for returning capital instead of investing in growth. At the end of the second quarter, Apple's cash pile stood at a record $202.8 billion.
Billionaire Carl Icahn is sure to be pleased by the reported progress of Apple's car aspirations. In a May missive to CEO Tim Cook, Icahn spent more than 400 words extolling the virtues of the car opportunity.
"At $1.6 trillion, the enormous addressable market for new cars is approximately four times the size of the smartphone market," Icahn wrote. "We believe the rumors that Apple will introduce an Apple-branded car by 2020, and we believe it is no coincidence that many believe visibility on autonomous driving will gain material traction by then."
Apple, which has already made inroads toward addressing the auto market with CarPlay, could leverage its expertise in lithium ion batteries, Icahn argued. "As a mobile device that is differentiated by design, brand, and consumer experience where software and services are increasingly critical, an Apple car would seem to be uniquely positioned." he concluded.
In June, Forbes' Detroit bureau chief Joann Muller laid out 10 reasons why Apple should get into the car business, chief among them the financial wherewithal and brand value to hit the ground running. Apple also has the ability, like Tesla, to enter a capital-intensive industry without the legacy issues and costs that burden established players like Detroit's Big Three and international competitors like Toyota and Volkswagen. The entire auto group was taking a battering in the market Tuesday, with Volkswagen down 16% amid an emissions scandal. (See "VW's $7B Screwup: A Lesson In How To Destroy A Brand.")
The auto business requires significant industry expertise, and even though Apple has reportedly been hiring engineers from the likes of
Actually manufacturing cars "would contrast with [Apple's] typical 'asset light' approach," Goldman Sachs analyst Simona Jankowski wrote in a report Tuesday. "However, it could partner or work with contract manufacturers, much like the equivalent of Foxconn for iPhones."
The "asset light" assumption also answers a natural question that arises when pondering just how much Apple will have to spend developing its car business: why not just buy Tesla? With a $34 billion market cap, Elon Musk's company would be easily digestible from a dollars and cents perspective, even at a rich premium, but perhaps less so when it comes to Apple's interest in actually manufacturing vehicles versus just designing them. Setting and meeting production targets has been the focal point of several Tesla stumbles over the last few years.
Whichever strategy it pursues, Goldman agrees with Icahn that Apple is uniquely suited to tackle another primary consumer-facing product category. "The car, like the home, is another environment where Apple can add value via an operating system and increase the stickiness of its ecosystem," Jankowski writes.
Not everyone shares the upbeat view on Apple trying to throw its weight around in the auto business. In a note to clients Monday, UBS analyst Steven Milunovich acknowledged a number of compelling reasons to enter the car business, ranging from the need for "large consumer markets to fuel growth" given Apple's size, to the opportune timing of joining the industry at a moment of disruption as electric cars and autonomous vehicles come to the fore.
But Milunovich warns that there are just as compelling reasons to be wary. "Cars are hard and Apple may be overextending its brand," he writes. Margins could be narrower than other devices, meaning overall profit growth may come at a price; long product cycles and stiffer regulation make the auto business far different from the upgrade-every-year smartphone cycle; the pace of improvements in battery technology is slowing; and a 2019 target date is likely ambitious given the occasional stumbles experienced by Tesla.
From an investment perspective, any potential impact from the auto effort is likely years away from impacting Apple's bottom line. However, getting into the auto business doesn't necessarily guarantee a re-rating of Apple's stock. While the iPhone maker remains cheap on a price to earnings basis (less than 9 times after stripping out its $200 billion-plus in cash), automakers hardly enjoy lofty multiples.
On the other side of the spectrum are the lofty valuations on auto businesses like Tesla and Uber, built more on the potential for earnings years down the line than current results. A multiple moving toward that end of the ledger would be welcome change for Apple. (See "Tesla's Real Battle Might Be With Apple, Uber And Google.")
Though it remains in the early innings, the potential opportunity in autos is an intriguing one for Apple investors mindful of the company's reliance on the iPhone as its main profit powerhouse. Goldman's Jankowski, who assumed coverage of the stock this week as part of a coverage shift at the firm, doesn't even include the car in her rationale for a buy rating with a $163 price target.
"We will continue to monitor developments and potential monetization, but do not include any expectation for revenues in our model at this point given the early stage of the project and minimal company disclosure, and do not view this as core to the thesis," Jankowski writes.