In a deep-dive research note Friday, Suva writes that entering the automotive market could be the catalyst that drives Apple’s market capitalization to $3 trillion from $2 trillion. While there has been plenty of talk about an Apple car, the company hasn’t addressed the possibility, and has a policy of not discussing future product plans.
“Yes, we do believe Apple will likely make an Apple Car via outsourced production and that this will be part of the road for Apple to travel from a $2 trillion market cap to $3 trillion,” Suva writes.
He concedes that cars would have margins below the current corporate average, but thinks the returns to Apple would be above the cost of capital—and create shareholders value.
Suva notes that by 2025, the electric vehicle market is expected to be larger than the PC, tablet, smartphone and wearables markets combined. “The debate around whether Apple will enter the automotive market, in our view, is not one of ‘if’ but ‘when and to what extent,’” Suva writes.
The Citi analyst adds that one reason for Apple (Ticker: AAPL) to consider creating an automotive business is simply that it has the resources to do it. “Many may ask why Apple is considering entering other markets,” he writes. “In our view, the answer is that, as Apple generates over $70 billion of free cash flow per year and while continually deploying cash for stock repurchases and dividends, the company still has excess cash.”
Suva lays out two scenarios for how Apple could enter the market.
In the more aggressive version, Suva sees Apple using outsourced production to make an Apple Car, boosting overall sales by 10% to 15%, and lifting Ebitda— earnings before interests, taxes, depreciation and amortization—by between 5% to 11%. But none of that would happen “beyond 2023.”
Alternatively, he says, Apple could amp up CarPlay, the company’s software for in-house entertainment and information systems. He sees a potential impact there of about 2% on sales and 1% to 2% on Ebitda.
“There is likely a much more material impact to Apple from making a car via outsourced production rather than just focusing solely on the IT ecosystem,” he concludes. “We think such an entry would likely be beyond 2023 given the long lead time for automobile production. But, Apple’s due diligence in this area could cause automotive OEMs to increase adoption of Apple’s CarPlay in the near term.”
In the note, Suva rattles off a list of potential innovations that Apple could include in its own car. His list includes:
- Smart side window displays with touch to view entertainment and surf the web.
- Navigation, weather and safety data projected on the front windshield.
- Child safety detection, to ensure unaccompanied kids aren’t left inside
- Detection of safety concerns/violations with notifications to family members
- In-car entertainment, in particular Apple TV+ and Apple Arcade.
- Hands-free ordering of groceries, food and other goods.
- Pick-up notifications
- Keyless car entry
- Car maintenance and service notices; robo driving to service centers.
- Wireless device charging
- Wireless car charging at home or elsewhere on big capacity power mats
- Solar cells to charge the car
Apple shares on Friday are down 1.8%, to $119.83, giving the company a market cap just a tad over $2 trillion.
Write to Eric J. Savitz at [email protected]