Apple’s Decision To Scale Down Car Project Is A Positive For Investors

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Bloomberg is reporting that Apple (NASDAQ:AAPL) has significantly scaled down its automotive ambitions, dropping plans to build an electric car of its own, instead focusing on creating a self-driving platform that would give it the flexibility to partner with existing manufacturers or return to eventually developing its own autonomous vehicle. While the reports of an Apple-branded car have always been exciting, given the company’s long history of disruptive innovation, we believe that cutting back on the automotive project is a sensible decision at this juncture. Below we outline some of the reasons for this.

Our $120 price estimate for Apple is roughly in line with the current market price.

See Our Complete Analysis For Apple Here

Making A Car May Not Add Significant Shareholder Value

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We have been skeptical about whether Apple’s automotive foray would pay off in terms of boosting its bottom line and creating shareholder value. Unlike Apple’s consumer electronics business, which is a high-volume, high-margins affair (about 300 million devices per year, 20%+ net margins) the company may have faced a major trade-off in the auto market, having to opt between thin margins in the mass market, or meager volumes in the premium space. Considering these limitations, we previously estimated that Apple’s car business could optimistically add about $30 billion to its market cap (a relatively trivial 5%). (See our detailed assumption and calculations) For perspective, we estimate that if Apple’s iPhone increases and maintains its share in the global mobile phone market by just 1% in 2017 (we project market share of 10.4% this year), it would add more value for Apple shareholders than an Apple Car would.

Manufacturing Could Be Cumbersome And Capital Intensive

Apple has typically focused on the engineering, product development and marketing aspects of its consumer electronics business, while outsourcing production to contract manufacturers such as Foxconn and Quanta. However, the concept of contract manufacturing isn’t really prevalent in the auto industry and Apple would have to build, tool up and staff manufacturing facilities if it wanted to produce its own electric vehicle. Moreover, the firm would have had to work with a complex automotive supply chain. Additionally, automotive manufacturing comes with significant regulatory and labor issues. The capital that Apple may have deployed in its potentially lower-margin automotive manufacturing foray would be better invested in share buybacks, boosting returns on equity.

Apple’s Recent Track Record Of Innovation Has Been Spotty

Apple’s core competency has always been in producing easy to use computing devices. However, the firm’s track record of innovation in the Tim Cook era has been somewhat underwhelming, with a lack of truly disruptive product launches such as the iPhone or iPod. The Apple Watch – the company’s only new product line in the last 5 years – hasn’t lived up to expectations, and most other product updates have only been evolutionary. Given Apple’s relatively middling recent track record of innovation its core business, it may not be realistic to expect a cutting-edge product in a completely new domain such as automobiles. Moreover, the automotive market doesn’t really suffer from a dearth of premium or innovative brands (such as Tesla) and it’s difficult to see a niche that Apple may have carved out for itself.

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