Apple – Hot wheels

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Infotainment makes more sense than a car.

• Apple has money to burn, but I think that success has not gone to the collective head of the management team.
• If the chatter is correct, there is a project inside Apple taking up the time of 1,000 employees that is looking at the creation of an automobile.
• This would be a fully electric car that would probably be capable of driving itself. (Apple will need to fix its map first if it wants the car drive itself outside of California).
• With 1,000 people on the project, it is going to be costing around $100m a year to run which is far too much given how far-fetched this idea is.
• My single biggest concern on this idea is that a car does not fit Apple’s business profile.
• Apple makes high-end products with high margins and does not push into the mass market often at the expense of growth.
• Cars are not very profitable and in fact many car companies make more money on the financing they offer to customers than the cars themselves.
• Consequently, it is very likely that even if a car was successful, it would put Apple’s margins under meaningful pressure.
• Historically, this is something that Apple has assiduously avoided throughout its history, and I suspect that this would have an adverse effect on the valuation of the shares.
• Hence, I suspect that Apple has a small skunkworks operation that is looking into ways in which it can draw the automobile into the iOS ecosystem.
• I very much doubt that there are 1,000 people on this project and would make an estimate of 100.
• I don’t think it will end up making a car but it is not impossible that it ends up making the infotainment unit for the automakers to integrate into their vehicles.
• This is a device on which it could make excellent margins because Apple would not have to be making 40% gross margins on engines, wheels, brake pads and so on.
• Furthermore, the sales opportunity would be much greater given that the Apple unit would going into products that are already well established in the market.
• Finally, given that the best automakers tend to be very bad at making decent infotainment units, there is an opportunity for both sides of the equation to benefit.
• This is a project that I can see delivering value for shareholders in contrast to a car which would probably do the opposite.
• Apple has cash burning a hole in its pockets but I think that success has not gone to its head and that prudence continues to rule the roost.
• That being said, the catalyst I have been looking for an Apple has now passed, and I am looking further afield to Microsoft or Google for sort term upside.