Interview: Katy Huberty on the Apple Car

Excerpts from a conference call with Morgan Stanley clients that landed on my desktop Monday:

“What we know for sure… is not much.” Apple has acknowledged that the company has potential to add value in the auto market and that they are definitely willing to put capital behind that belief. Apple recently announced that Dan Riccio (Apple SVP Hardware Engineering) became head of an internal project at Apple and is reporting directly to Tim Cook. We think that it is fair to assume that he’s probably leading the car project. This comes after a fair amount of turnover (according to the press) on Project Titan. Beyond that, we would not expect Apple management to comment directly on its car project going forward. We may need to rely on the press and supply chain data points from here to understand how Apple may enter the market.

An Apple car can leverage the ‘halo effect’ of its vertically integrated ecosystem. Apple is most successful (and most interested) in markets where there is a benefit from integrating hardware, software and services to improve the consumer experience. There’s also a ‘halo effect’ when Apple enters new markets. Apple has >1 billion live iPhone users in the market today and there is an increased tendency for these consumers to migrate towards other Apple products and services. So putting the Apple brand on a vertically integrated product is typically the way that they would enter a new market. Apple may also be able to leverage their innovation in financing, distributing and leasing products (and trade-ins) and this could prove effective in disrupting the car retail market. Apple currently has the most productive retail on a per-square-foot basis. Apple is also seen as highly innovative in how they service their product.

Apple has a history of using its balance sheet to support suppliers in their early development. Despite its vertical integration, Apple will leverage suppliers and manufacturers to quickly scale a business, thus taking advantage of the supplier’s manufacturing expertise and component differentiation (leaning on hundreds of suppliers). They have also demonstrated a willingness to fund the capacity build-out to ease the burden on suppliers who typically have to add capacity well before the production ramp. Before the iPhone, Apple was spending $1bn/year on capex… but at peak, reached $13bn annually on capex, the majority of which was spent on purchasing manufacturing equipment for suppliers.

My take: Morgan Standing is plowing ahead with the Apple Car theme, Hyundai’s demurrals notwithstanding. For Apple investors, the most relevant part of Huberty’s remarks — at least in the near term — may be this:

It’s interesting to see the auto supplier stocks shoot up on Apple Car media reports, while Apple’s share price has remained largely unchanged despite the TAM [total available market] opportunity. It suggests to us that investors don’t price in future innovation at Apple… it begs the question whether we are at an inflection point where Apple investors are being forced to ‘price in’ the future impact of a market that is so significant.

16 Comments

  1. Kirk DeBernardi said:
    “It suggests to us that investors don’t price in future innovation at Apple…”

    Well, hot damn. Ain’t that the rub?

    3
    February 8, 2021
  2. Tommo_UK said:
    “ What we know for sure… is not much.”

    That’s as far as I needed to read after 10 days of crazy detailed explanations. Cheers. Next time get some actionable information, rather than cheer leading.

    2
    February 8, 2021
    • Mark Visnic said:
      “What we know for sure… is not much.”

      Gurman/bloomberg is confirming MS doesn’t know much, at least about its assumption on Dan Riccio.

      According to Gurman, “(Bloomberg) –Apple Inc. executive Dan Riccio is focusing on the company’s upcoming virtual and augmented reality devices after he shed his role as the head of hardware engineering, according to people with knowledge of the move.“

      1
      February 8, 2021
      • Alan Trerise said:
        Riccio focusing on the headset signals to me they are trying to hit some market window and are likely behind. Quite typical.

        For a new platform to have a chance at success out of the gate it will need content. This means developers will need time to produce it prior to launch. Are they be trying to get a development platform ready for this June’s developer conference or next year’s?

        1
        February 8, 2021
      • Alessandro Luethi said:
        A car screen could be a paramount application of augmented reality!

        BTW what is Jony Ive doing already?

        0
        February 9, 2021
  3. David Emery said:
    Point #3 is the significant one, both from a supply chain management perspective and from a “tea leaves reading” perspective.

    And on an earlier topic: I’m not sure we’d see Apple Mx chips in an Apple Car, unless Apple sets up a separate supply chain. Automobiles are very nasty environments, with temperature extremes, vibration, etc. Apple could well do ‘industrial use’ Mx chips, but I doubt they would use the same chips in a car that they use in an iPhone/Laptop.

    3
    February 8, 2021
    • Fred Stein said:
      Agree strongly David. Apple’s ability to manage, and strategically invest in, the supply chain may be one of the biggest disruptions to the industry.

      Still, their leadership in the chip/software/services towers like a minaret in the desert.

      0
      February 8, 2021
  4. Gregg Thurman said:
    It suggests to us that investors don’t price in future innovation at Apple…

    Reading the press this morning on Hyundai’s statement that they are not (at this time?) in talks with Apple I expected AAPL to decline commensurant with Hyundai (~6%).

    I was surprised that although AAPL did decline the amount was relatively insignificant. I watched AAPL for 2 hours before placing a weekly trade FEB 12 $134/$135 @ 68¢. At the time I placed the order these contracts were trading for 75¢. On their way down they dipped to 66¢ and are now trading for 71¢. Max value is $1.00 and require AAPL to Close above $135 this Friday.

    Historical (10-year average) trade patterns suggest that AAPL will trade flat tomorrow then rise to ~$139 this Friday. I hope history repeats itself.

    1
    February 8, 2021
    • Troy Thoman said:
      I decided to take the ride with you this week Gregg… I paid $.67

      1
      February 8, 2021
      • Gregg Thurman said:
        It would appear that both of us should have held out for a better entry point. That said I feel good about the Spread I purchased.

        1
        February 8, 2021
        • Tommo_UK said:
          “ I’m not playing this game. Just sold 60% of my AAPL in the PM and will take a view as the days(s) go on.”

          Still staying out end of day. I’m often wrong but the action for a week now seems like the setup for a dip and a double twist before the hands in the air ascent to the top of the rollercoaster.

          I’ve been burned too many times to ignore flashing warning signs of over exuberant analysts, mythical products, a stock stuck in the mud in the face of its peers around it facing regulatory pressures Apple need never have nightmares about in comparison.

          Anyone fancy joining me shorting BTC for a trade? 🙂

          1
          February 8, 2021
        • Troy Thoman said:
          The end of the day solved that entry point problem 😉

          0
          February 8, 2021
  5. Mark Visnic said:
    AAPL not only didn’t discount the TAM opportunity on what is a credible and material initiative, the share price ironically (not so ironic to knowledgeable, experienced Apple investors) AAPL was impacted negatively by the news.

    In my view, it provides another pricing inefficiency for both Luca Maestri and me to exploit.

    “It’s interesting to see the auto supplier stocks shoot up on Apple Car media reports, while Apple’s share price has remained largely unchanged despite the TAM [total available market] opportunity. It suggests to us that investors don’t price in future innovation at Apple….”

    2
    February 8, 2021
  6. John Konopka said:
    “Morgan Standing”? PED, I think you got bit by autocorrect.

    3
    February 8, 2021
  7. Jerry Doyle said:
    “… it begs the question whether we are at an inflection point where Apple investors are being forced to ‘price in’ the future impact of a market that is so significant.”

    Apple is entering personal transportation. Apple has to do so to remain competitive & grow new sources of revenues or else it becomes a stationary tech company losing its competitive drive to lead. We are at an inflection point. Apple investors are being forced to “price in” the future impact of a (very competitive) market that is significant. The inflection point is the automobile industry moving toward EV transportation with competitors (other than Tesla) making the transition where their function of competing is increasing. Every competitor in the personal transportation race knows that Apple is a force with which to be reckon. As Apple moves forward to compete the partial vacuum it creates in its wake is the rising point of inflection where functions become known. It is an auto manufacturing race where finally one swings out of a slipstream overtaking all others. Those of you who race bikes know how you swing out of a slipstream to overtake a cyclist. As you do, your helmet vibrates with the G-force of the oncoming wind. You also know that one false move & you will be picking gravel out of your teeth for weeks. This is where Apple & all car manufacturers are positioned in catching Tesla.

    0
    February 8, 2021
  8. Gregg Thurman said:
    Just added to this quarter’s revenue/EPS. Dropped my 4 yo iPad Pro on daughter’s ceramic tile floor. Screen gone. Pickup replacement in AM. First time I’ve had one fail on me, and it was my fault.

    0
    February 9, 2021

Leave a Reply