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Apple, Inc. Officially Dips Its Toes Into Ride-Hailing

By Evan Niu, CFA - May 13, 2016 at 2:56PM

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The Mac maker possibly just tipped its hand a little bit.

Image source: Apple.

With all this talk about Apple (AAPL 0.96%) making an electric car, the company sure isn't doing a whole lot to squash speculation. On the contrary: Apple has now confirmed that it invested a cool $1 billion in Chinese ride-hailing service Didi Chuxing. Didi Chuxing also happens to be Uber's biggest rival in the Middle Kingdom.

Uber CEO Travis Kalanick didn't take too kindly to the storyline:

Keep in mind that the @apple account does not actually belong to Apple (the Mac maker has other social media accounts such as @AppleSupport and @AppleMusic, among a few others).

CEO Tim Cook told Reuters that he sees a lot of areas where Didi Chuxing could collaborate with Apple in the years ahead. "We are making the investment for a number of strategic reasons, including a chance to learn more about certain segments of the China market," Cook added. "Of course, we believe it will deliver a strong return for our invested capital over time as well."

Apple-Car-as-a-Service (ACaaS)?

The news serves as supporting evidence for fellow Fool and resident auto expert John Rosevear's theory that Apple is primarily interested in building an autonomous ride-sharing service instead of an electric car to sell directly to consumers.

It's worth noting that whatever strategic plan Apple is taking with its auto ambitions will also dictate the design of the car itself. The fact that autonomous cars are on the horizon is already shaping many design choices at existing automakers, particularly when it comes to the interior. Alphabet's recent partnership with Fiat-Chrysler is also meaningful, since the company is using minivans -- probably the least exciting form factor imaginable, but also the most practical when considering ride-sharing due to higher passenger capacity and comfort.

I tend to think that Apple plans on tackling both models, since direct car ownership will still likely comprise the majority of the market for the foreseeable future, and it's possible to incorporate both models with the vehicle's design. Tesla's forthcoming Model 3 is similarly expected to have increased autonomy, but we won't know more until "Part 2" of the unveil.

It's going to be quite a while until we officially see what Apple has planned, but at the very least the theory that Apple is at least incorporating ride-sharing into its plan just got a lot stronger.

Services and semantics

Over the past two quarters and related conference calls, Apple has tried very hard to shift the investing narrative to focus on its large and growing services business. The company is acutely aware of investor skepticism around peaking iPhone sales, even though the iPhone is an incredibly robust global business.

As Apple continues this broader transition to emphasize recurring revenue sources, it becomes more obvious why Apple would be interested in building a ride-sharing service. To be clear, I consider "ride-hailing" and true "ride-sharing" to be different services. While the current services out there like Uber and Lyft are often called "ride-sharing" services, I think it's more apt to call them "ride-hailing," or perhaps "amateur-unregulated-cabbies-driving-their-own-vehicles-with-poor-insurance-coverage" services. True "ride-sharing" will come with autonomous vehicles, but maybe we're just talking semantics.

This doesn't happen often

There's another important factor to acknowledge here: Apple rarely makes strategic equity investments.

Most of the time, if Apple wants something, it goes out and buys it. That includes both technology and talent, and has historically been limited to relatively modest price tags. Sure, Apple's massive investment portfolio also includes some corporate securities ($128.9 billion at last count), but those are mostly investment grade bonds and other debt instruments whose investment goal is capital preservation and income.

The $1 billion is just chump change for Apple, too. Since this is a Chinese investment, it's a better use of Apple's foreign reserves ($208.9 billion).

The Reuters report doesn't specify if Apple's investment is debt or equity, but presumably it is equity since that's how most strategic investments work, and that would grant Apple greater access to strategic discussions and data.

Thanks a lot, Tim.

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