Apple Stock: Would an Apple Car Be “Pointless”? (AAPL)

Advertisement

Have you heard that Apple (AAPL) is developing an electric car of sorts? Of course you have.

Apple Stock: Would an Apple Car Be "Pointless"? (AAPL)While the Apple Car (iCar?) is generating a lot of buzz, former General Motors (GM) Vice Chairman Bob Lutz made some great points about its future on CNBC, claiming the the Apple Car is pointless — worse than pointless.

Is he right, or is Lutz wrong altogether?

The automobile industry is a low-margin business at best, with operating margins below 5% for GM and Ford (F). Meanwhile, Apple has an operating margin over 30%, a margin that shareholders have come to expect. Therefore, if the Apple car business ever gets really big, it could weigh on margins.

Beyond that, no one makes money on electric cars, and there is no reason to believe that Apple has some secret ingredient for success. Specifically, Apple has no experience with cars, so how could it do a better job than the likes of GM or Ford?

Collectively, this is what Lutz had to say about Apple’s entrance into the electric car business, implying that the move won’t be good for Apple stock price long-term.

Where Lutz Is Wrong

It certainly appears that the Apple Car is a pointless, or a worse than pointless, initiative; one that Apple should abandon immediately. However, back when the iPhone was first introduced, no one thought a company could generate high margins from a phone.

Nowadays, the iPhone is the most profitable product in history with a profit margin that may top 70%, according to IHS. Therefore, while Lutz makes some great points, I am not sure it is wise to rule Apple out of the car business.

Furthermore, the comparison to GM, Ford or other high-volume automakers seems misaligned with Apple’s historical approach to hardware. More than likely, Apple will strive to be a producer of high-end vehicles that are loaded with bells and whistles.

One idea is that Apple might even try to acquire an existing automaker, a company that already has the technology, manufacturing capabilities, brand power and experience to make a smooth transition. Of course, Tesla (TSLA) comes to mind, but I think Ferrari is an interesting choice as well, especially given its spinoff from Fiat Chrysler (FCAU).

With Apple already hiring a boat load of ex-Tesla engineers, taking a brand like Ferarri and incorporating some Tesla-like concepts with Apple tweaks might be the best way to go.

Nevertheless, it seems kind of premature to write off a company that has $203 billion in cash on its balance sheet. Notably, that’s almost $30 billion more than it had to start the year. Therefore, Apple has a lot of cash and it needs to put that money to work somewhere.

Apple already has a phone, tablet, desktop computers, laptops, watches and, aside from that, it’s well positioned for the Internet of Things. With a $650 billion market capitalization, and such a large cash position, Apple must continue to move forward and enter new product categories to keep investors happy and growth alive.

Yes, the Apple car or iCar may be a flop, but if Apple were to spend $30 billion and fail would anyone really lose any sleep or care?

The answer is no, and as an Apple stock holder, I am glad to see the company being aggressive and willing to enter new markets. After all, Apple can buy any expertise that’s needed to help put its own unique spin on the automobile industry.

So, while Lutz may be right that Apple entering the auto space seems pointless, investors should feel confident that if any company can do it successfully, it is Apple.

As of this writing, Brian Nichols was long shares of AAPL.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/09/apple-car-icar-aapl-stock-gm-f-tsla/.

©2024 InvestorPlace Media, LLC