Funding financial institution Morgan Stanley believes the “Apple Automobile” has a chance to drive down the usually razor-thin margins of the auto trade and pose a risk to Tesla.
In an online name with traders, Morgan Stanley lead analyst Katy Huberty spoke about rumors of an Apple-designed self-driving automobile or autonomous automobile system. She answered questions alongside the financial institution’s Chinese language and European battery groups.
Talking about Apple’s automobile alternatives, Huberty mentioned that it is smart for Apple to enter the automobile market due to the entire measurement of the trade. Smartphones, Huberty factors out, are a $500 billion whole addressable market (TAM). Apple has about one-third of this market. However the mobility market is “$10 trillion.”
“So Apple would solely want a 2% share of this market to be the dimensions of their “iPhone enterprise,” she factors out.
Some of the vital elements in Apple’s potential entrance into the auto market is vertical integration, the analyst added.
“Apple actually solely succeeds when it is vertically built-in. This implies designing the parts and designing each a part of the product the way it seems and feels to the buyer, the software program and the ecosystem that surrounds these merchandise,” she mentioned.
Due to that, Huberty forged doubt on a partnership with one other automaker. She additionally factors out that Apple has already invested in areas related to an auto product, together with working methods, processors, batteries, cameras, and shows.
That vertical integration may even apply to Apple’s in depth financing and trade-in service program, in addition to AppleCare. “Financing and leasing and trade-in packages are extremely vital to a profitable auto technique,” she writes.
If Apple controls each or most elements of an “Apple Automobile,” it’s going to have a chance to drive down the usually razor-thin margins of the auto trade. That is one sticking level complicated traders concerning the rumors.
“With respect to margins, traders steadily say that the present auto trade margins are extremely unattractive in contrast with Apple’s present mid-20% EBIT margins at the moment. However I might remind everyone that when Apple entered the PC, handset and wearables market, the margins of rivals have been razor skinny,” Huberty writes.
By means of a vertical integration technique and driving scale on a restricted variety of SKUs, Apple has proven a capability to “enter industries with low profitability and earn very robust margins. I do not see why autos could be any totally different.”
“The auto market seems similar to the trade construction and profitability of many different markets Apple has entered up to now,” she provides.
Though the “Apple Automobile” story first surfaced years in the past, Huberty says Apple is in a greater place now as a result of it is producing extra of its parts in-house. The transfer into a brand new market may additionally carry down Apple’s churn fee to principally zero.
With regards to the timing of an “Apple Automobile” launch, Huberty notes that Apple isn’t first in an trade. A present timeline of 4 to 5 years out “is smart, but it surely’s actually attainable they arrive out a 12 months or two later.”
And it is attainable that Apple may produce the automobile within the U.S.
“Tim Prepare dinner has mentioned there shall be different Apple merchandise made within the US and a automobile could be an ideal instance of that. When a product launches, often over [half] of income could be within the US so you’d need to manufacture domestically within the US or Mexico from a logistics standpoint,” Huberty says.
One of many larger questions is whether or not Apple’s automobile would pose a risk to Tesla and present automakers.
“The query is, is Tesla Blackberry or is Tesla Samsung? After the iPhone launch, Samsung was a really profitable firm alongside Apple for a few years. And because the market shifted from function telephones to sensible telephones, Blackberry fell to the facet regardless that they have been early available in the market,” Huberty says.
The analyst provides that “there may be an instance the place each Tesla and Apple might be profitable for a few years and assist develop the market collectively.”
Huberty maintains her 12-month AAPL worth goal of $144, primarily based on a sum-of-the-parts mannequin. She arrives at that estimate by making use of a 5.5x enterprise value-to-sales (EV/Gross sales) a number of on Apple’s product enterprise and a 13.6x EV/Gross sales a number of on Providers. That ends in an implied 7x EV/Gross sales a number of for the 2021 fiscal 12 months and a 32x enterprise worth to free money circulation a number of.
Shares of AAPL have been priced at $129.54 in intra-day buying and selling on Thursday morning, up 2.33%.