Apple’s lengthy flirtation with the auto enterprise divides analysts
Wall Street analysts on Monday had a number of reactions to a Reuters report that Apple could begin producing an electric car in 2024 based on new internally developed battery technology. The report rekindles the talk of Apple’s entry into the auto business, which was first reported in 2015. Apple never commented on the reports.
While some analysts view the auto business as a big new market for Apple to grow into, others say the reported plan to make an Apple-branded car could flow into the reality of the auto business: high investments for low margins.
Reasons for doubt
Apple’s current business is based on selling premium computers, phones, and accessories. Cars are a lower margin business, a different sector from Apple’s traditional strength, and it takes a lot of investment to make a car successfully.
Other analysts still see the car as a research project rather than actual product development.
“Apple is doing research and development in many areas and while we are not surprised that the media is again discussing Project Titan for cars, we are very skeptical that Apple will actually produce a car because the profitability of the automotive sector is much lower” Citi analyst Jim Suva wrote in a note.
Evercore analyst Amit Daryanani also doubts Apple would get into the low-margin, capital-intensive auto business. However, he suggested that the project might be worth it if the company successfully invented a breakthrough in battery or self-drive technology.
Reasons to believe
Other analysts were more optimistic about Apple’s entry into the auto market. Apple investors have been asking for an important new category of product as sales of iPhones, the company’s largest business, have not grown consistently in recent years. Some analysts pointed to the huge market for automobiles as well as the time spent in it.
Morgan Stanley analysts said companies like Apple want to get into the auto industry not only because of the money that can be made selling cars and parts, but also because people who drive in cars are a captive audience, whose time could be monetized. The team, led by Adam Jonas and Katy Huberty, estimated that more than 600 billion hours are spent in cars each year.
Tesla’s soaring share price – it’s up more than 600% this year – also lets analysts see parallels with Elon Musk’s electric car company.
Baird analyst William Power wrote in a statement Tuesday that automobiles are a multi-trillion dollar market, a “massive long-term global opportunity,” citing the company’s forecast that Tesla’s sales this year will rise by 40 % could rise to $ 42.2 billion, suggesting a possible likelihood of earnings for an Apple-branded car. (Apple had fiscal 2020 revenue of $ 274.51 billion with a gross margin of around 38%.)
Apple is also one of the very few companies that has the resources to break into the auto market, according to analysts, with its massive cash reserves and the ability to recruit top technical talent. Apple could also benefit from a shift in the automotive industry, where computers and software are becoming increasingly important to the sale of cars, allowing the company to highlight its strengths in hardware and software design, analysts said.
“Vehicles are fast becoming ‘computers on wheels’, so Apple’s background software / silicon / electronics could be useful when working with a company like Magna,” wrote Daryanani, a contract auto maker.
How would Apple make money?
The biggest question among analysts, however, is how Apple would monetize its auto project. One possibility is selling Apple-branded cars. Other options include selling related mobility services or licensing software to traditional automakers, as suggested in the Reuters report.
Morgan Stanley analysts suggested that Apple could sell some sort of transportation subscription, not competing with traditional auto companies who sell cars.
“We don’t think Apple wants to get into the auto industry as it was designed by today’s automakers,” wrote Morgan Stanley analysts. Instead, they believe that Apple may be aiming to create a better car experience with its design and software chops, and monetize it through its current matrix of subscription and service products.
Long-time Apple analyst and founder of Loup Ventures, Gene Munster, wrote Monday that Apple’s auto business has two possible avenues: building an Apple-branded car or developing licensable software for other automakers. However, he notes that this option would allow the appearance of the vehicle to be in the hands of other companies. That would be atypical for the iPhone manufacturer, which has control over prices.
He believes Apple has not yet decided which path to go, but suggests that an Apple-branded car is more in line with the company’s earlier steps.
“This is Apple’s wheelhouse: find a large market where a competitor has already made headway, step into it a few years later and revolutionize it,” wrote Munster.