The recent rumors and buzz suggesting Apple (NASDAQ:AAPL) has several hundred employees secretly creating an Apple-branded electric vehicle may have left many scratching their heads. But is it really that crazy?
Longtime Apple analyst Katy Huberty from Morgan Stanley and her colleague Adam Jonas, who covers Ford and Tesla (NASDAQ:TSLA), don't think so. Sure, an Apple-branded car may not be a near-term event, they admit. But Apple's initial foray into autos with CarPlay, the company's new infotainment interface for iPhone, could be the beginning of an eventual full-on attempt to disrupt the entire auto industry, the analysts argue.
"[A]fter over 100 years of status quo, the industry needs a change agent," the analysts said. And that change agent could be Apple, they argued in a note to investors (via Barron's).
Why Apple may want to build its own car
One of the main reasons why Huberty and Jonas believe Apple may have ambitious plans for autos is because of the sheer size of the industry. At a $750 billion market capitalization, the largest in the world, it will be increasingly difficult for Apple to find large enough projects to continue to grow meaningfully. But Huberty and Jonas say a move to enter the auto business would dramatically expand Apple's addressable market.
Being in the car could be very important for Apple. By our calculations, the automotive [total addressable market] is $10 trillion of installed base, with and [sic] annual new vehicle revenues of ~$1.6 trillion. This dwarfs smartphones at $400 [billion] and PCs at $266 [billion] of annual revenue. ... If AAPL were to corner just 25% of the value of the car, it would be equivalent to the entire smartphone industry today.
The analysts' calculations for the total addressable market are "high level numbers and do not account for the value of the rest of the auto industry (aftermarket, service, etc.) or PC / smartphone industry (apps, subscription-based models, etc.)."
Apple's approach would be different
Today, the value of a car derived from software is about 10%, the analysts say in their note. But with software taking on a more important role in the vehicle, this figure can increase rapidly. Consider Tesla's frequent over-the-air updates for its growing Model S fleet -- a Silicon Valley move that instantly gave the company an unparalleled lead in adding value with software in the auto industry. Huberty and Jonas estimate that, thanks to the inevitable advent of the autonomous car, more than 60% of the value of a vehicle will eventually come from software.
Apple's approach to capturing value in the auto industry, therefore, would likely be tied to the growing value attributable to software, the analysts argue.
Very quickly, the infotainment starting point can spread to the rest of the interior especially the HMI (human machine interface), ergonomics/controls and even interior design. We would be surprised if Apple stopped there, however, and over time it could grow from the inside out to be a bigger part of the car. ... We note that Apple prefers to develop and design its products in-house, and to outsource the actual production and assembly process.
While the risks associated with entering such a different industry may at first seem insurmountable, investors should give proper weight to both the tech giant's historical success in disrupting industries and its $178 billion in cash and marketable securities (almost three times the size of Ford's $63.7 billion market capitalization).
While Apple's secrecy will likely keep investors in the dark regarding this potential long-term project for the company, Apple's development of CarPlay in the coming years may provide some insight. If Apple's investment in the space grows and the company begins to push new boundaries, it may signal it has bigger ambitions than a simple extension of the iPhone to a vehicle's infotainment system.
The size of the auto industry paired with the opportunity for the car to evolve into the "fourth screen' for media consumption [after PCs, mobile devices, and TV] are too large for Apple to ignore," Huberty and Jonas believe. Is CarPlay only the tip of the iceberg?