Excerpted from the transcript of a Morgan Stanley investor conference call that landed on my desktop Wednesday:
Q: Why would it make sense for Apple to enter the car market?
Huberty: Most cite Apple’s strong brand and an impressive balance sheet. But this is not reason alone to enter any market. But we see several other reasons why it is quite likely that Apple does a car. One is the size of the market. Smartphones are a $500bn annual TAM. Apple has about 1/3 of this market. The mobility market is $10 trillion. So Apple would only need a 2% share of this market to be the size of their iPhone business.
Q: How would Apple approach autos in terms of outsourcing supply?
Huberty: Apple really only succeeds when it’s vertically integrated. This means designing the components and designing every part of the product… how it looks and feels to the consumer, the software and the ecosystem that surrounds those products.
Remember that Apple has also built an extensive financing and trade-in service program as well as exceptional support through AppleCare. Financing and leasing and trade-in programs are incredibly important to a successful auto strategy. We don’t think partnership with another automaker is a real path for Apple.
Q: The auto industry is a low margin/low return business — why would Apple be interested given the poor industry margins?
Huberty: With respect to margins, investors frequently say that the current auto industry margins are highly unattractive compared with Apple’s current mid-20% EBIT margins today. But I would remind everybody that when Apple entered the PC, handset and wearables market, the margins of competitors were razor thin. And through vertical integration, as well as driving significant scale on a small number of SKUs, Apple has been able to enter industries with low profitability and earn very strong margins. I don’t see why autos would be any different.
Maintains Overweight rating and $144 price target.
My take: More certain than I expected.