WSJ: Apple car already baked into the stock price

From Dan Gallagher’s “Apple Needs One More Thing Again” ($) in Thursday’s Wall Street Journal:

This isn’t the first time Apple has seemed on the threshold of challenging Detroit. The Wall Street Journal reported in 2015 that the company planned to launch an electric car in 2019. A year later, the company was laying employees off from the project and rethinking its plans. Automobiles have indeed proved to be a tricky area for tech giants to disrupt. And Apple investors who treasure the company’s 38% gross margins would be in for a rough ride; the world’s top-10 auto makers by market value average gross margins of 15%, according to data from S&P Global Market Intelligence.

Apple certainly has some interesting things cooking. The company spent a record $18.8 billion in research and development for the fiscal year ended September. That equates to just under 7% of annual revenue—the highest portion since 2003, when Apple was in the early days of developing the first iPhone.

But after running up more than 78% this year, Apple shares now trade at 33 times forward earnings—more than triple its multiple in 2015 when the first car rumors were swirling. Which means investors are already banking on dreams of the next big thing.

My take: Plenty of time before the car shows up to knock the stock down again.

23 Comments

  1. Tommo_UK said:
    At the risk of sounding like a Judas, I agree with the broad premise of the article even if I have issue with some of the rather sloppy examples and comparisons used. The genie is out of the bottle.. the stock celebrated for Christmas and as far as I’m concerned the risk/reward for trading it now is skewed in favour of stepping aside and trying to enjoy Christmas (challenging in London, where we have travel bans and lock-downs).

    I sold out of my trading position yesterday around $132.50 and am back to holding my core which I built on the dip from summer around $103.

    I’m still a buyer on a pullback though, but with the news of 30% increased iPhone orders already out, stellar M1 reception, the Apple Car doing the rounds again (excuse the pun) and no bad news from “analysts with contacts familiar with the matter yet” this seems like a good peak to jump off from even if I miss another run up.

    We’ve all been through January blues before and while I expect a mammoth earnings report of unparalleled proportions , a lot can happen between now and then.

    Thanks for the blogs Philip, and to everyone for such interesting commentary. It’s been while since I’ve participated in AAPL much or discussed it to trade around. Merry Christmas, Happy Solstice, or whatever phrase best suits your personal beliefs.

    3
    December 23, 2020
    • Romeo A Esparrago Jr said:
      Thanks, Tommo:-)
      Happy Holidays to you, Mr. Philip, all the members & readers of Apple 3.0.
      Maligayang Pasko!

      5
      December 23, 2020
    • Mark Visnic said:
      @Tommo

      You know the old saying: Bulls win in bull markets; Bears, in bear markets; and pigs, they just get slaughtered.

      And selling a trading position too soon, though painful, is a pretty good problem to have.

      That said, I think AAPL’s break out has little to do with the Reuters news on car and battery technology, and more to do with iPhone 12 uptake, expected increase in the installed base that follows, upside in services rev that follows that, and M1-driven Mac market share growth. Fundamentals are pointing higher and the chart suggests potential ath take-out, then 140, then 150 in fairly short order.

      I know you have more than you sold, so, cheers!

      Happy holidays to my AAPL brothers and sisters in the PED 3.0 community! Thanks to Philip for creating it!

      5
      December 23, 2020
      • Tommo_UK said:
        @Mark
        The rally has been relentlessly good news on flawless execution and the best product lineup I’ve seen in over a decade, along with strong evidence of simply enormous demand (just go on Tik Tok and see how many teens will not be seen dead using anything other than an iPhone 12 and wear Apple Watches – trends in the making).

        The car and battery news definitely caused a surge in the stock up yesterday though, without question. It may not keep it there but it did add 5% onto the price overnight without question IMO.

        0
        December 23, 2020
  2. Jerry Doyle said:
    While the world’s top-10 auto makers by market value average gross margins of 15%, none except Apple have the ability to integrate hardware and software seamlessly on a subscription service basis and retain current software updates as needed. The technological user interface in cars are deplorable. Apple wants to own it all with its products and services. Apple helps you get a good night’s sleep, helps you get your daily exercise regimen going, helps you do your work, your studies, your reading, your entertainment, your communication, and now transportation to your destination while still using Apple services integrated tightly with your lifestyle. Margins will be well north of 15%.

    3
    December 23, 2020
  3. bas flik said:
    difficult comparing multiples with all the money printing nowadays. its hard if not impossible to find cheaper stock then apple.

    2
    December 23, 2020
  4. Jonny T said:
    Same arguments applied to launch of iPhone! Too many established players, no expertise, low margins da de da de da. Well, if anyone on this blog wants to entertain any of these nonsense arguments then good luck, you’re on your own as far as I’m concerned!

    6
    December 23, 2020
  5. Mark Visnic said:
    “But after running up more than 78% this year, Apple shares now trade at 33 times forward earnings—more than triple its multiple in 2015 when the first car rumors were swirling. Which means investors are already banking on dreams of the next big thing.”

    My view is that as long as this “view” is held by the consensus, stay long AAPL because it is a marker for expectations being too low.

    This “view” rests on the hardware/blockbuster film revenue model instead of the ecosystem recurring revenue model and does not hold a consumer products multiple expansion in its “box.” Thanks to Rod Hall and Toni Sacconaghi and a few others for influencing the consensus to hold onto that view. It allows more time to accumulate.

    The relative multiple will continue to grow, not always linearly, but, it is still too low. That’s my story, and I’m sticking to it.

    The 3x+ multiple expansion from 2015 is a commentary on the misperception in 2015, not the level in December 2020.

    6
    December 23, 2020
  6. Steven Philips said:
    “. Which means investors are already banking on dreams of the next big thing.”
    I don’t think it means what he thinks it mans. 🙂

    2
    December 23, 2020
    • Mark Visnic said:
      @Steven

      Right on 🙂

      0
      December 23, 2020
  7. John Konopka said:
    “ This isn’t the first time Apple has seemed on the threshold of challenging Detroit”

    Apple won’t challenge Detroit. Tesla is trying to challenge Detroit by making a car not significantly different than any car coming from traditional automakers except that it has an electric motor and battery.

    I have no idea what Apple will do, but I’m pretty sure they won’t just make another car, just like they didn’t just make another cell phone, tablet, or watch. They will somehow reinvent the category in a way that will delight customers and produce good margins for Apple.

    0
    December 23, 2020
  8. Bart Yee said:
    Apple is not looking to be in the top-10 of volume automobile manufacturers – yet. IMO, Apple is unlikely to build a common, utilitarian widget car for the low end/midrange – yet. And Apple is not going to follow traditional automotive supply chain for a long time, if ever.

    Want to know which business and sales model Apple is likely to follow? Here’s a vehicle line which has a 49% gross margin and makes up 29% of its company’s overall revenue. Same demographic as iPhone 12 Max users IMO. Again, Apple could do much worse than to emulate the Porsche 911 story, in fact, it already has emulated it over the past 12 years.

    0
    December 23, 2020
      • Very interesting stats. They speak of the automobile manufacturing as a low-margin business, but your data show that you can make excellent profits selling a small number of expensive cars.

        0
        December 23, 2020
        • Bart Yee said:
          Exactly! If you have a passionate user base, exciting designs, deliver on excellent performance and relative value, you can play in the upper high to high end, price accordingly, and maintain very good margins. The groundwork for this was Porsche’s CEO Wendelin Wiedeking who led Porsche from 93-2009. He was a trained engineer but rose to production manager, then CEO when Porsche was almost bankrupt.. He changed old methods to lean JIT production a la Toyota, modernized models, led SUV and sedan introductions to diversify product lines, and modernized all of Porsche’s sales and support.

          A few parallels:
          “Wiedeking, then 40 years old, with his spectacles and moustache looked like “a clerk at a venetian blinds manufacturer”, according to Der Spiegel magazine” Wiedeking asserted in a 2006 interview that “every product must earn money. Otherwise you are simply pursuing a hobby, which is no task for an auto-business”. And In 2007 (Porsche’s) stock market value rose from 300 million to 25 billion euro.

          Sound familiar?

          0
          December 24, 2020
          • Bart Yee said:
            Wiedeking would have even succeeded in Porsche taking over VW had the 2008 recession not been triggered and blew up his financing and takeover plans. IMO, that would have been much better for VW AND Porsche instead of VW taking over aporache and having CEO Ferdinand Piech who in some ways reminds me of Musk except for all the outside personal stuff Piech got Into.

            0
            December 24, 2020

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