Apple Inc

Fundamentals

Written by Ophir Gottlieb and Jason Hitchings, 02-11-2016

PREFACE
We just learned, yet again, that Apple (NASDAQ:AAPL) has poached a critical executive from Tesla (NASDAQ:TSLA). Forbes reported yesterday:


Before joining Tesla, Porritt was the chief engineer at Aston Martin and a principal engineer at Land Rover, according to the Forbes article. We note here, rather sternly, this man is an engineer -- a builder -- not marketer.


WHAT'S REALLY HAPPENING
Apple is positioning itself to enter into one of the world's largest and most competitive industries. The road to success is fraught with hazards and the potential reward is huge. Apple has built one of the strongest brands in history, turning electronic devices into status symbols through their brilliant marketing, design aesthetic, and reputation for dependability.

Now they will put their brand and technology prowess to the test as they plunge into the market of the world's most recognized status symbol: The Luxury Automobile.

THE TITAN IN THE ROOM
We start by capturing what is publicly known or widely believed about the Apple Car project, code-named "Titan". First, when Apple CEO Tim Cook was pressed on the rumors he said, and we quote:


If that's not obvious enough that Apple is working on an actual vehicle, here's some more evidence:

• Elon Musk calls the Apple Car project an "open secret" and that it's "obvious" Apple is working on a car. The San Francisco Chronicle reports that Musk met with Apple's acquisition chief, Adrian Perica, in 2013, and likely CEO Tim Cook as well.
• Apple is poaching talent from across the automotive and battery industries. So much so, that, according to CNN:
  A123, an electric car battery maker, sued Apple for poaching its staff earlier this year. The Massachusetts company claimed that Apple has hired away five high-tech PhD and engineering employees, causing "irreparable harm."
  Another report states that enough engineers have been drawn away from Tesla as to impact Tesla's product roadmap, according to Apple Insider
• Over a thousand engineers are now said to work within Project Titan, according to CNBC and many other sources.
• CEO Tim Cook has held discussions with BMW at BMW headquarters and toured the BMW i3 electric car manufacturing facility, according to Forbes and others.
• CML Pro broke news that Apple registered apple.car and apple.auto website domain names.

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THE GRAVEYARD
Elon Musk took to Apple's poaching of Tesla engineers rather abruptly when he called Apple the graveyard for employees who can't make it at Tesla. Further, Elon Musk has openly stated that he believes it's possible that Tesla could be as large as Apple some day. Those are aspirations that go well beyond the $60 billion market cap of General Motors (NYSE:GM) and take us into the stratosphere of $600 billion.

For the record, within a decade, Elon Musk could be "closer to right" than many give him credit for. Tesla is absolutely crushing the automotive world. In fact, the Tesla Model S was the best selling large luxury vehicle last year, was the only vehicle in its class to show a sales increase and further yet, it even out sold the Mercedes S Class in Germany itself. Call Tesla's products what you like, the only objective description is an incredible success.



We give such high praise because it's only with this reality that Apple would forge into a new frontier. And friends, we believe Apple is going for it -- all in.

THE POTENTIAL
The automotive industry is one of the world's largest markets, with luxury cars alone accounting for $360 billion per year in sales and growing fast:



The electric vehicle market weighed in at over $80 billion in 2012 and is projected to hit greater than $270 billion by 2019:

The world's largest vehicle producer is Volkswagen, with global sales of over 200 billion Euros per year, followed closely by Toyota (source: Statista).

Put in perspective, Volkswagen alone has roughly the same total revenue as Apple's $240 billion USD. A successful launch for Apple could realistically double revenues, and with time, operating margins and substantial new profits would be sure to follow.

THE RISK
It's not just a fun idea. There is risk in this endeavor like no other Apple has ever seen since its darkest days of near bankruptcy 15 years ago.

In 2010 an antenna problem with the iPhone 4 was a recoverable embarrassment. In the automotive realm, any mishap could have dire consequences. When Tesla was a little known startup with grand ideas, they were able to survive several batteries catching fire. Serious, potentially dangerous problems with the Apple Car would likely have far broader implications with down-stream effects across the Apple ecosystem.

And remember, it's the Apple ecosystem that defines this tech marvel in entirety.

HOW WILL APPPLE DO IT?
Looking at Apple's R&D spending, we see clearly the massive investment Apple is making in its future:



Apple is now spending $2.4 billion per quarter on R&D, and we've discovered where a sizeable chunk of the expenditure is likely going. We also note that Apple has generated larger earnings than any company has ever in the history of financial markets and its cash balance is swelling so large that its cash alone would be one of the twenty largest companies in the world as a standalone entity.

No company is better positioned to make a huge technological investment, backed by a brilliant marketing campaign, and championed by a beloved brand, than Apple. If Apple succeeds in releasing its car, they are likely to not only reap enormous financial rewards, but also to massively swell the size of the electric vehicle market and, in so doing, create a permanent shift to a new era of automotive history.

MORE MOTIVATION
Tesla's absurd success with demand for its vehicles and its rather abrupt competitive stance which is fairly "anti-Apple," is one motivation. The size of the entire market is yet another, as we discussed -- the largest auto manufacturer has revenue the same size as Apple.

But yet more motivation comes from three other companies. First, Google.

Google is not building a car and in fact, it's not even interested in self-driving "features." Google wants to build the guts of a totally autonomous self driving car. Human hands are not welcome. Google is pushing so hard that it has already begun the legislative process to get approval for the technology in general.

Taking a step back, the self-driving featured car segment is showing explosive growth. Here's the chart from BI Intelligence:



We're looking at 134% growth every year, for the next six-years. We would have to name more than 50 auto-manufacturers to list all the players here. But if we did that, we would actually miss the two other companies that Apple is watching. This is going to surprise you, but we're talking about Amazon (NASDAQ:AMZN) and Microsoft (NASADAQ:MSFT).

Yep, the mainstream media doesn’t talk about it but Reuters institutional news did. Here's a snippet:



THE BATTLE
The battle for self-driving cars will be one that pits Tesla, Apple, Amazon, Google and Microsoft head-to-head -- not Detroit and not Japan. The Apple car is coming, and Apple enters an industry for one reason -- to win.

WHY THIS MATTERS
There's so much going on with Apple it's impossible to cover in one report. It spans almost all of technology's transformative themes. But, to find the 'next Apple,' 'next Tesla,' or 'next FANG stock,' we have to get ahead of the curve. This is what CML Pro does. Our research sits side-by-side with Goldman Sachs, Morgan Stanley and the rest on professional terminals, but we are the anti-institution and break the information advantage the top .1% have.

Each company in our 'Top Picks' is the single winner in an exploding thematic shift like artificial intelligence, Internet of Things, drones, biotech and more. In fact, here are just two of the trends that will radically affect the future that we are ahead of:



The Internet of Things (IoT) market will be measured in trillions of dollars as of next year. CML Pro has named the top two companies that will benefit. Then there's cyber security:



Market correction or not, recession or not, the growth in this area is a near certainty, even if projections come down, this is happening. CML Pro has named the single best cyber security stock to benefit from this theme.

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Thanks for reading, friends.