Two bits of news Tuesday stirred the electric vehicle pot more than usual. First, Reuters reported exclusively that Apple Inc. (NASDAQ: AAPL) is targeting 2024 to begin manufacturing an all-electric, self-driving vehicle. Later in the day, Tesla Inc. (NASDAQ: TSLA) tweeted out that Apple CEO Tim Cook refused to meet with Musk to discuss an Apple acquisition of Tesla “during the darkest days of the Model 3 program.”
Apple launched an automotive program called Project Titan in 2014 to develop an EV of its own design. After narrowing its focus to the software needed to produce a vehicle, the company in 2019 pared some 190 people from the project.
According to Reuters’ sources, Apple has now decided to seek partners for some major components of a self-driving EV, such as the lidar sensors, while developing its own battery technology. In the end, though, there are a lot of reasons why an iCar is a bad idea.
The auto industry is extremely expensive. According to a report in Barron’s, Volkswagen has spent nearly $180 billion on manufacturing plants and equipment over the past 10 years. VW’s operating profit margin over that time period is about 7%. Apple, which has spent around $100 billion on plant and equipment over the same time span has an operating profit margin of around 28%. Investing a massive pile of cash in order to earn a smaller margin is not usually a winning idea.
Apple already has returned some $500 billion to shareholders in dividends and share buybacks, the largest capital return of any U.S. company ever. Its goal is to become cash neutral, and at the rate it is going, that is likely to happen sometime in 2023. After that, dividends will be paid out of cash flow. Without halting that cash return, even Apple will have a hard time financing an auto manufacturing operation. Investors are unlikely to respond well to an end to the company’s cash return plan.
If profit margins for automobile manufacturing are going to be a quarter of what they are for making iPhones, Macs and software, how will that affect Apple’s valuation? Currently, the company trades at a multiple of around 6 to estimated 2021 sales. Tesla, with a market cap of more than $600 billion, trades at a multiple of 13 to estimated 2021 sales.