Apple’s iCar is Slowly Becoming a Reality

It appears Apple will tap an existing automaker to manufacture the vehicle.

Theories surrounding Apple’s electric car aren’t going anywhere—EV’s are the markets’ hip new toy, and the Silicon Valley titan has stretched its tentacles into so many different pots that the rumors are starting to make too much sense. Which begs the question; should they really build an electric car? Evercore ISI analyst Amit Daryanani thinks so.

Whispers of an iCar car flared up again in December after Reuters reported that Apple [$AAPL] sought to roll out an autonomous EV by 2024. Apple’s pivot into the automotive market would be yuge, as the stock is worth more than the combined market cap of all traditional automakers combined.

Apple has been toying with cars since 2014 with little initiative, likely because EV and AV technology wasn’t yet prepared for prime time. Now that it is, by virtue of Tesla [$TSLA]—the only automaker with a valuation in the same realm as Apple. Its success has legitimately swayed investors into believing EV’s can be profitable.

Apple allegedly approached Hyundai about producing the electric car and supplying batteries—Korea is a global leader in lithium-ion battery cells.

Autonomous-vehicle tech, too, is snowballing at an accelerating rate. General Motors’ [$GM] Cruise autonomous driving received $2 billion from Microsoft [$MSFT] and other investors this past week, valuing the unit at about $30 billion. Cruise, along with Alphabet [$GOOGL], Tesla and others believe they can have “level-four autonomous vehicles,” which means the car can do everything under certain conditions on the road, in a couple of years. Level four autonomy would enable robotaxi services to become viable.

Alas, the car industry isn’t as profitable as the smartphone industry. So even though the car market is enormous—larger than smartphones—Apple might think twice about manufacturing a car. Daryanani doesn’t see how money will be a problem, as “aggregate mobility margin will not be dilutive in the long-run,” he adds. “Apple’s ability to sell software services will boost margins beyond traditional automakers.”

Daryanani forecasts Apple’s vehicle operation to generate $36 billion in sales and 30 cents in per-share earnings “in the long run.” He doesn’t define the long run, but $36 billion would make Apple iCar larger than Tesla is today. He rates the iPhone maker’s shares a Buy and has a $160 price target for shares, and believes Apple’s breakthrough into the car market will turn conventional vehicles into a software product on wheels like the iPhone made phones a platform for apps and mobile computing.

Apple is a notoriously secretive company, so we were not surprised to read a subsequent statement from Hyundai that specifically does not mention Apple: “We’ve been receiving requests of potential cooperation from diverse companies regarding development of autonomous driving EVs, but no decisions have been made as discussions are in early stage.”

To do so, Daryanani thinks Apple will partner with a contract manufacturer—like it does with smartphones—to produce Apple’s hardware designs. That’s the first issue Apple might run into. The contract manufacturing industry for phones basically dwarfs the industry for cars. Translation; the contract manufacturers would likely be existing manufacturers—like Government Motors.

Believe it or not, there is one automaker that’s as profitable as Apple. It’s Ferrari [$RACE]. Apple’s recent EBITDA came in at 29% , while Ferrari posted Ebitda margins of about 33%. Luxury approaches can work, but Ferrari only sells about 9,000 ultra-luxury vehicles a year. That’s only about 0.01% of the automotive market, and Apple will probably want to be bigger than that.

This could spark the renaissance of cars as a software-enabled product, which means expansive growth for the industry. And one reason car makers trade low price-to-earnings ratios is there is little industry growth. See GM; it trades for about 9 times estimated 2021 earnings. The S&P 500 multiple is greater than 20 times.

$AAPL YTD

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