It wasn't all that long ago that the rumors about Apple (NASDAQ:AAPL) building its own branded car were completely squashed. The New York Times reported last year that after Apple had worked on its own vehicle, dubbed Project Titan, since 2014, it was pivoting away from the project and instead focusing on autonomous vehicle software.
Since then, most of the news surrounding Apple and its car plans has been about the tech giant's intent to build and potentially license software for autonomous vehicles. But a recent report published by noted Apple analyst Ming-Chi Kuo has stoked the rumors that Apple is again focused on building and selling its own car.
Here's what investors should know about Kuo's predictions and why they should take all the new information with a grain of salt.
Apple's next big product?
Kuo's report, which was republished by MacRumors, says that Apple will launch its car between 2023 and 2025. Here's what Kuo predicts:
We expect that Apple Car, which will likely be launched in 2023–2025, will be the next star product. The reasons for this are as follows: (1) Potentially huge replacement demands are emerging in the auto sector because it is being redefined by new technologies. The case is the same as the smartphone sector 10 years ago; (2) Apple's leading technology advantages (e.g. AR [augmented reality]) would redefine cars and differentiate Apple Car from peers' products; (3) Apple's service will grow significantly by entering the huge car finance market via Apple Car; and (4) Apple can do a better integration of hardware, software, and service than current competitors in the consumer electronics sector and potential competitors in the auto sector.
There's a lot to unpack in Kuo's statement, but I think it's important right now for investors to rein in any of their expectations for an Apple Car. Why? Because, despite Kuo's reasoning, there aren't many overlaps between the automotive and the technology industries.
First of all, despite Kuo's belief that there are "potentially huge replacement demands" in the automotive sector, they would be nowhere near the replacement cycles that companies experience for smartphones. No company, not even Apple, will experience replacement of their vehicles just because a few new technologies emerge every few years.
Consider that the average transaction price (what people pay the dealer) of a new car at the end of 2017 was $36,113, and the price for a new luxury vehicle -- a category that an Apple Car would likely fall into -- was $57,827. Vehicle owners aren't going to drop tens of thousands of dollars every couple of years just because new technology emerges in a vehicle. Nor are there going to be enough people who can afford to trade in their slightly used vehicles so they can buy a luxury Apple Car. Some might, for sure. But again, this isn't like trading in your old smartphone. Upgrading a $700 to $1,000 phone every couple of years is already a big ask; replacing cars every few years because of incremental tech upgrades is simply inconceivable.
That doesn't mean we won't see an Apple Car. But I'm still skeptical. If Apple is working toward its own vehicle, it would mean that Apple will be making a fundamental change to its entire business. The amount of time, effort, and money that releasing its own car would entail will effectively make Apple an automaker and no longer a technology device maker. Perhaps Apple wants that, but Tesla has shown just how difficult it is to build a new car from the ground up. And there's no reason to believe that Apple would be able to avoid production problems similar to those that have plagued Tesla (though that situation is improving).
More to the point, Apple has recently earned gross margins in the range of 38% to 39%. Unfortunately, the automotive industry typically doesn't enjoy that level of profitability, even for very successful vehicles. Consider that Ford's F-150 pickup (which accounts for about 90% of the company's global profit, according to Morgan Stanley) sells for an average price of $47,000 and the company makes about $10,000 for each truck. That would give Ford a gross margin of roughly 21% for one of its most profitable products. That shows just how much lower vehicle margins tend to be, relative to what Apple's used to.
Don't make any investing decisions on these rumors
Kuo's predictions might prove right in the end, but I don't think investors should spend too much time speculating about the possibilities. Apple is very good at keeping secrets, which means we are unlikely to know about the company's true plans for a vehicle until very close to its launch. So any moves based on Kuo's comments right now would be investment decisions that are based purely on speculation, which is usually a very poor investing strategy.
Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Tesla. The Motley Fool is long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Ford. The Motley Fool has a disclosure policy.