Can Project Titan Drive Apple Stock?

  • Apple's electric car project, Project Titan, could be closer to becoming reality than earlier thought.
  • Apple has managed to successfully crack the China market, which is s good thing for the company since demand for premium vehicles in China is projected to skyrocket by 2020.
  • Project Titan has huge revenue potential, and could turn out to be Apple's second most successful product after the iPhone.
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Apple’s (NASDAQ:AAPL) self-driving car initiative, codenamed Project Titan, has for a long time remained shrouded in mystery. Although Apple is known to be very secretive about ongoing projects and only lets the investing world catch a glimpse of behind-the-scene happenings when it’s ready to launch, the company is expected to give the project a mention during its upcoming September 9 event, meaning Project Titan is much closer to becoming a reality than earlier thought. This should be interesting for Apple investors because the potential of the project to drive Apple stock is huge, perhaps more so than Apple Watch.

Project Titan: A Looming reality

There are quite a number of indications that Project Titan could be much closer to becoming reality than earlier thought. Senior Apple executives recently toured BMW’s Leipzig factory to learn how the world’s largest premium car maker manufactures its i3 electric car. BMW has in the past been cautious about sharing its electric car manufacturing know-how with Apple, but has lately opened up to licensing parts of its portfolio.

Apple has repeatedly poached senior engineering talent from disparate automakers including Tesla (NASDAQ:TSLA) as it seeks to build out its own car team. Apple appears to be taking advantage of the move made by Tesla last year when it made its electric car patents open-source.

But the biggest indication that Project Titan could soon become reality is a report by The Guardian that Apple executives recently met with GoMomentum engineers as it seeks to use the 2,100-acre secure testing facility commonly used by automakers to test their self-driving cars.

Sizable opportunity for Apple cars

Apple appears to be following in Google’s (NASDAQ:GOOG) (NASDAQ:GOOGL) footsteps by investing in deep-tech R&D to drive future growth for the company. Google is one of the pioneers of self-driving and autonomous vehicles. Apple though has a much better track record when it comes to R&D that translates into real money whereas Google’s record is spotty at best.

The market for premium cars, including self-driving and electric cars, is expected to become the fastest-growing auto segment. Industry experts had earlier estimated that self-driving cars will not become a reality on our roads until 7-8 years down the road. But current indications are that those estimates could be too conservative. Audi expects to unveil a fully autonomous car, Audi 8, in 2017, making it one of the first companies to the market with a self-driving vehicle.

Apple is targeting the electric car market, which though still tiny compared to the traditional auto market, is growing in leaps and bounds. Bloomberg reported that Apple expects to roll-out its first electric car in 2020. But that again might be a bit conservative, given that Project Titan is perhaps a few years ahead of where many analysts placed it. Apple’s Project Titan has no doubt benefited immensely from the lessons learned from Tesla and its electric cars. Tesla has shown the world that the traditional barriers of entry into the auto market are not as high as earlier imagined.

And, Apple appears to be making good progress regarding one on the key components of electric cars--the battery. The company has poached senior engineers from A123 Systems, a leading electric car battery manufacturer. There are further reports that Apple has its eyes on other battery engineers from companies such as Samsung, Toshiba, LG Chem, Panasonic, and Johnson Controls. It really won’t come as a surprise if an Apple-branded electric vehicle is ready in 2-3 years flat.

So just how big is the opportunity or Apple? It turns out quite huge. KPMG recently released a comprehensive report of the global automobile market. According to the organization, annual light vehicle sales are expected to reach 118 million by 2020, of which the premium segment is expected to account for 15% of sales volumes.

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Apple usually targets the high-end of the market for its products, and it’s unlikely to change its approach with its electric vehicle. Electric cars range in price from as little as $23,845 for the Mitsubishi i-MiEV  to $137,450 for the BMW i8. Apple’s electric car is likely to be in the ballpark of Tesla’s Model S which is priced at $75,000-$105,000. Assuming Apple car is able to grab 5% of the premium car segment by 2020 that would translate to sales of 885,000 vehicles. An ASP of $80,000 would translate to revenue of $70.8 billion, or about 15% of Apple’s revenue by 2020 assuming the company’s top line growth averages 20% over the next five years.

Though the automobile business in general sports lower gross margins than Apple, premium car makers such as BMW and Porsche sport gross margins that are actually comparable to Apple’s. So growth by this segment is not likely to have a large impact on the company’s gross margins.

The China factor

The KPMG report pointed out that China will become the most important market for premium vehicles by 2020. This is a good thing for Apple since the company has already cracked the China dilemma. Part of the reason why Apple has lately been successful in China while Tesla continues to struggle lies in the fact that the company recognized early enough of the need to manufacture products directly in China. Apple has iPhone factories in China while Tesla’s plants are concentrated in North America. The Chinese Government tends to favor foreign companies that manufacture their products in China thus creating local jobs. Apple understands the intricacies of the Chinese market and will no doubt use its wealth of knowledge to attack this market.

And all that talk about the Chinese market slowing down is overblown. The current slowdown in manufacturing activity in China is just part of a normal cyclical downturn that is not any worse than what the country has undergone in the recent past.

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Bottom Line

The Apple car project could turn out to be one of the company’s most lucrative projects, with a revenue timeline closer than earlier estimates. Apple has a pretty good track record when it comes to monetizing new products, and Project Titan is likely to become another Apple hit. The project could become a significant future value driver of Apple stock.

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