Apple Might Pick a Partner for Its iCar. But It Might Not Be Tesla. - Barron's

Apple’s entry into the car market could represent a “new bear case” for Tesla stock.
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Reports that Apple wants to introduce a self-driving electric vehicle to the marketplace by 2024 is making waves. The plans are vague, which has triggered speculation on Wall Street this week about what an Apple car could mean for Tesla, the EV leader, as well as the entire industry.

A lot of ideas are floating around—such as why Apple wants to be a car company as well as how it might execute that dream. One theme that keeps coming up in research notes is a partnership between Apple (ticker: AAPL) and some existing car maker.

Apple declined to comment about its plans for cars. If it is looking at cars, it’s probably because it’s one end market that is larger, in terms of dollars, than even phones.

Morgan Stanley analyst Adam Jonas wonders if Apple’s participation could make the global car market even larger. “Prior to the iPhone the global mobile phone market was 1 billion units in 2006,” wrote Jonas in a Thursday research report. “By 2010 the global market was 1.6 billion.”

That amounted to about a 12% average annual growth rate over that span. If Apple could do that to cars it would mean, very roughly, 145 million light vehicles sold around 2028.

It’s an interesting idea, but unlikely. The modern car was invented more than 100 years ago. The smartphone was invented in 2006. What’s more, cars retail for an average of roughly $27,000. New phones are about $1,000. And cars last for about 12 years, while phones get recycled after a couple. Automotive TAM—Wall Street’s buzzword for total addressable market—won’t blow up with Apple’s entry.

Jonas also wrote earlier in the week that Apple’s entry into the car market could represent a “new bear case” for Tesla stock (TSLA) because of increased competition. But some see Apple’s entry as a win for Tesla.

Wedbush analyst Dan Ives points out that cars expand Apple’s addressable market. “However, as we have seen in decades of following Apple, many products/strategic ideas happen in the labs of Cupertino that ultimately never leave the confines of Apple Park,” he tells Barron’s. “We believe there is much higher chance this is a strategic EV partnership with the likes of Tesla” or Volkswagen (VOW.Germany).

A strategic partnership is something Gary Black, former Wall Street analyst and Tesla investor, believes is likely too.

Black proposes Apple take a stake in Tesla, and Tesla accelerates the Apple car development, having it ready by 2022 and not 2024. It’s a little like Tesla becoming for Apple in cars what Foxconn is for Apple in phones. (Foxconn assembles the phones.)

It’s a speculative idea, and Black isn’t a traditional analyst anymore, but he pays close attention to Tesla and, with more than 34,000 Twitter followers, is an influential voice on the stock.

RBC analyst Joseph Spak wrote Apple has the brand and capital to make a car, but also believes it would outsource assembly. “All of this points to more potential competition for traditional auto makers, for Tesla and some of the new EV startups,” wrote Spak on Monday. “To that end, we wonder if some traditional OEM would approach Apple, or vice versa.” OEM is auto industry jargon for original equipment manufacturer like General Motors (GM).

Spak doesn’t cover Apple, but he covers Tesla. He rates share Sell and has a $339 price target. Jonas rates Tesla shares Buy and has a $540 price target. He set that price target in mid-November. Wedbush analyst Dan Ives rates Tesla stock Hold, his target, set more recently than Jonas, is $715 a share.

Tesla stock is down about 5% this week, at $662.54, after gaining about 14% the week before in the run-up to its inclusion in the S&P 500. Apple shares are up almost 5% this week, at $132.33. The S&P is down 0.2% and the Dow Jones Industrial Average is flat.

Write to Al Root at allen.root@dowjones.com

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