Apple Inc. (AAPL) is always the subject of acquisition speculation. And lately, Tesla Motors (TSLA) is the biggest subject of Apple buyout rumors.
Fortune’s Aaron Task made a bold prediction on Thursday. He said that Apple , with electric car aspirations and over $200 billion in cash, will buyout all TSLA stock in 2016. This is an Apple move that some have predicted previously, but not many have put an actual date on their prediction.
Unfortunately for AAPL stock pundits making predictions like this, Apple is never going to acquire all of TSLA stock. And talk of otherwise are just typical Apple rumors that will amount to nothing.
Why AAPL Will Leave Tesla Alone
Ever since rumors of an Apple Car or iCar started to circulate, Tesla stock has been a hot point of M&A discussion. While there are clear positives for Apple to make the acquisition, the underlying reason it will never acquire TSLA stock comes down to price, profits and strategy.
First, Tesla stock may be well off its highs, but with a $30 billion market capitalization it is still very expensive. TSLA stock value is about half that of larger competitors like General Motors (GM) from a market cap perspective, but with just $3.8 billion in trailing 12-month revenue it is just a fraction the size when it comes to sales; GM has more than $150 billion in 12-month revenue.
Unlike other tech giants, Apple is not really known for its willingness to pay huge valuation premiums or make $10 billion bets or larger for acquisitions. Apple owns its core hardware and software, and what it doesn’t own the company leases and contracts to suppliers.
Not too long ago former GM Vice Chairman Bob Lutz went on CNBC and correctly pointed out that the auto industry has very low margins (5% or lower) whereas AAPL has very high margins (30%-plus). Therefore, paying a huge premium for a low margin auto company could ultimately have a negative effect on AAPL stock. In other words, Tesla stock is too expensive and lacks profits, two big problems for AAPL.
Lutz also pointed out that electric cars are yet to be profitable, and with AAPL having no experience in cars, there is no reason to think it has figured out some recipe for success that GM can not. However, the one area where AAPL does have something to offer is in software, and also hardware that could be compatible in automobiles.
In retrospect, it makes little sense for AAPL to spend billions of dollars to acquire Tesla stock, and then billions more on R&D and to develop these electric cars only to grab a marginal share of the industry — and at a low margin.
It makes more sense for AAPL to penetrate the interior of vehicles with both hardware and software, products that can drive revenue higher and keep margins well over 30%.
What AAPL Stock Will — And Won’t — Do
Historically, AAPL has wanted to own all facets of the consumer experience (iPhones and iOS). This approach has driven the notion that Apple will want to own both the vehicle and all of the components within.
But realistically, AAPL has been content to share its success with others in recent memory, partnering with credit card companies and banks for Apple Pay, partnering with recording labels for Apple Music, and allowing 1.5 million developers to put their apps on its App Store. Ultimately, this approach grows AAPL’s ecosystem larger, and makes its product better for consumers and businesses.
In other words, AAPL is great at picking its points, knowing what areas of a market to target and then using the expertise of partners to make that service or product successful. Therefore, it makes no sense to own 1% of the auto industry entirely with a Tesla acquisition if AAPL can get its high margin hardware and software into 10% to 20% of all new vehicles sold.
So while no one knows for sure what AAPL will do in the auto space, one thing it won’t do is acquire Tesla stock. It makes no sense strategically, and it would not add shareholder value.
Brian Nichols owns shares of Apple stock.
