Can Apple Be The New Tesla - Smartphone On Wheels By 2025?

Summary

• With FQ2'22 net income of $25.01B and Free Cash Flow of $25.65B, AAPL has all the capital it needs for its ambitious Apple Car project.
• With a rumored launch by 2025, AAPL investors have much to look forward to, since it has not released any major products recently.
• We shall discuss if AAPL could overtake TSLA's reign in the EV industry moving forward.

Iván Jesús Cruz Civieta/iStock via Getty Images

Investment Thesis

Apple's (NASDAQ:AAPL) latest quarterly earnings call only proves why it is a force to be reckoned with in the gadgets industry, given that the company reported a record-breaking net income of $25.01B and Free Cash Flow of $25.65B in FQ2'22. With its rumored entry into the AR/VR market by 2023 and the autonomous EV market by 2025, it is no wonder that many AAPL fans and tech analysts are also hyped out, given that the company has not introduced any new major products since Apple Watch in 2014.

Nonetheless, despite the constant comparison to the EV global leader, Tesla (TSLA), the EV market is undeniably large enough to accommodate multiple players, given that the global EV industry is expected to grow to $823.74B by 2030, at a CAGR of 18.2%. As a result, we expect AAPL to continue with its groundbreaking innovations, while delivering robust financial performance moving forward.

The Rumoured Apple Car Is Coming For Tesla's Dominance

Since AAPL was rumored to be working on "Project Titan" in 2014, the Apple Car has been the subject of many discussions, given the CEO's rare discussion on the topic with Bloomberg in 2017:

We're focusing on autonomous systems. It's a core technology that we view as very important. We sort of see it as the mother of all AI projects. It's probably one of the most difficult AI projects actually to work on. (Bloomberg)

It is no wonder then that AAPL's AI and machine learning chief, John Giannandrea, and Kevin Lynch, the man behind Apple Watch, are both watching over the development of its own autonomous EVs, based on the rumors swirling around. In addition, there have been multiple reports and photos showing the company's test vehicles with multiple sensors and cameras on public roads in California since early 2017.

There have also been endless speculations on AAPL's automaker partners, including Hyundai-Kia Motors, Nissan, General Motors, PSA, LG Magna e-Powertrain, Toyota, and Porsche. Furthermore, renowned battery companies, such as CATL, BYD, LG, and the SK group, had been mentioned as potential suppliers. However, we expect AAPL to proceed with Foxconn instead, given their long-standing partnership, growing battery/EV capabilities, and its multiple global manufacturing facilities. Chips-wise, we believe AAPL will likely go with QUALCOMM (QCOM), given its leading position in the semiconductor and mobile industry, which will combine AAPL's current smartphone technology with the automotive autonomous software.

Given its historical operations, we believe AAPL will largely rely on its contract manufacturers for the custom-designed automotive hardware. At the same time, the company will provide its integrated Software as a Service (SaaS) as Smartphone on Wheels, through its internal development since 2017, though we cannot rule out a potential collaboration with QCOM on its Snapdragon Digital Chassis as well. Nonetheless, we admit that these rumors are highly speculative, given that AAPL has been known to be highly secretive about its product developments.

Moreover, although multiple rumors suggest that an Apple Car with Level 5 autonomy may be on the way, we anticipate the company will first release a toned-down version for its users as a trial, similar to TSLA's current release at Level 2 with a Level 5 in beta testing for later release. As a result, no one will know for sure of the eventual form for the first generational Apple Car, though we expect it to be closer to AAPL's usual perfect marriage of form and function, instead of APPL SaaS on ordinary hardware and chassis.

Given that the automotive industry is an entirely different animal compared to digital gadgets, we doubt AAPL will go as far as TSLA in setting up its own automotive Gigafactories, since it would take enormous capital, time, and effort to do so. Nonetheless, no one knows the future. So, there is also a far-fetched possibility that AAPL may partner with its contract manufacturers for multiple production plants globally dedicated to the Apple Car; naturally, it is assuming that there is sufficient demand over the next decade.

AAPL Operating Expenses

S&P Capital IQ

It is evident that AAPL has been aggressively increasing its operating expenses over the years, while also almost doubling its Research and Development expenses, from $3.95B in FQ2'19 to $6.39B in FQ2'22. It is evident that part of these expenses went into its EV development since 2014.

AAPL Revenue by Geography

S&P Capital IQ

Based on AAPL's FQ2'22 and FQ2'21 revenues by geography, it is evident that its bulk of sales happens in the US, with China trailing third. In addition, the demand for AAPL products in the US also rose YoY by 3.7% points from $34.4B in FQ2'21 to $40.88B in FQ2'22, highlighting the spending power of its consumers in the region. In the meantime, TSLA's revenues are also largely attributed to the massive demand in the US and China, representing over 70% of its sales in the region. Given that the company reported a waiting list of over a year for its EVs, it is evident that TSLA remains the top choice for many EV users globally.

TSLA Revenue by Geography

S&P Capital IQ

Consequently, we infer that AAPL's autonomous electric vehicle will likely receive massive demand from the two countries, given how the US EV market is expected to grow from $24.03B in 2020 to $137.43B in 2028 at a CAGR of 25.4%. In addition, the Chinese EV market will grow even faster at a CAGR of 30.1%, from $124.2B in 2021 to $799B in 2027. However, we suspect that AAPL's EV would be released in the US first on a smaller scale and only ramp up in production for global release, if there is sufficient demand/ supply.

Nonetheless, we do not expect many issues in AAPL's consumer demand, given how its products always exceed consumer expectations and broke the incumbents' dominance. Through its iPhone in 2007, the company had broken Nokia's and BlackBerry's (BB) reign in the cellphone industry, while also making its Apple Watch released in 2014 a "breakout star of wearables," by combining fitness tracking capabilities with talk and text functionality. Given that AAPL is also set to enter the AR/VR market by the latest 2023, we expect a similar impact to FB's Oculus Quest 2 and the future Project Cambria, which is set to launch in 2022.

As a result, we expect AAPL's autonomous electric vehicle to form a significant share of its revenue stream, once it is launched sometime in 2027 or earlier. Given the company's aggressive recruitment of:

• Desi Ujkashevic, a former Ford Motor (F) executive with 31 years of experience in electric vehicle engineering.
• Ulrich Kranz, a former BMW executive.
• Stuart Bowers, a former Tesla executive working on self-driving software.
• Jonathan Sive, an ex-manager at Tesla, Waymo, and BMW.

we anticipate its transition to a multi-product company beyond the digital gadgets to be successful, despite the multiple setbacks in recent years. Therefore, our answer to the thesis, is a resounding 'Yes, the Apple Car will likely overtake TSLA's reign as the most coveted premium EV within the next decade.'

For Now, AAPL Remains In Control Of Its Supply Chain

AAPL Revenue, Net Income, and Net Income Margin

S&P Capital IQ

In the past five years, AAPL reported excellent revenue growth at a CAGR of 11.15%. In the last twelve months (LTM), the company reported impressive revenues of $386B and a net income of $101.93B, representing YoY growth of 5.5% and 7.6%, respectively. In addition, despite the ongoing supply chain issues, AAPL had managed to sustain its net income margin at 26.4% in the LTM. Furthermore, the company reported record-breaking Free Cash Flows (FCF) of $105.79B and FCF margins of 27.4% in the LTM, representing excellent YoY growth of 13.8% and improvement by 2% points.

AAPL Cash and Equivalents, Free Cash Flow, and FCF Margin

S&P Capital IQ

For FQ2'22, AAPL reported revenues of $97.28B and net income of $25.01B, representing YoY growth of 8.5% and 5.8%, respectively. In addition, the company reported a tremendous jump in its FCF by 18.1% in FQ2'22, with improved FCF margins at 26.4%, compared to 24.2% in FQ2'21. On top of its robust FCF flows and $28.1B of cash and equivalents on its balance sheet in FQ2'21, there is no doubt that AAPL has more than enough capital to explore its next generational iOS product, the AR/VR glasses by 2023 and the Apple Car by 2025. As a result, it is evident that AAPL deserves its seat in the high-performing FAANG stocks, given its stellar execution post-COVID-19 pandemic and groundbreaking product offerings.

AAPL Revenue by Segment

S&P Capital IQ

As seen from the chart, it is evident that AAPL has been growing its revenues steadily through its best-selling segment, iPhone. For FQ2'22, the company reported revenues of $50.57B from its iPhone sales, representing an increase of 5.48% YoY and 62.8% from FQ2'19. It is evident that AAPL's loyal fans have been making up for the reduced spending in FY2020 during the COVID-19 pandemic in the past two years.

In addition, AAPL's services segment also grew tremendously to $19.82B in FQ2'22, representing an increase of 17.2% YoY growth and 48.4% from FQ2'20. Given that the company's Services net sales include advertising, cloud, payment, and other services, it is evident that the excellent growth could be potentially attributed to the changes to its privacy services and its 30% commission in the App Store. A Bernstein analyst, Toni Sacconaghi, had estimated that AAPL generated approximately $4B in ad revenue in 2021, with a potential of over $10B in incremental growth through ads in iOS apps.

Though iOS users only account for 25.49% of all smartphone users as of January 2022, it is evident that AAPL fans spend way more, since its consumers spent approximately $41.5B on the App Store, double those in Google Play by Android consumers in H1'21. Furthermore, with the SaaS embedded in its future Apple Car, we expect the automotive software to contribute significantly to the services segment moving forward, through over-the-air technological upgrades during the lifetime of the vehicle. As a result, we expect AAPL's advertising/ services segment to report excellent growth moving forward, overtaking Alphabet's (GOOG) $18B in ads revenue in 2021 through the Android apps.

AAPL Projected Revenue and Net Income

S&P Capital IQ

For the next three years, AAPL is expected to report revenue and net income growth at a CAGR of 8.2% and 6.38%, respectively. For FY2022, consensus estimates that the company will report revenues of $394.07B and net income of $99.95B, representing impressive YoY growth of 7.7% and 5.5%, respectively. Nonetheless, AAPL expected its FQ3'22 to underperform, with an approximate impact in the range of $4B to $8B, given the ongoing lockdowns in China and sustained silicon shortages impacting semiconductor productions. Nonetheless, given it translates to only 8% of temporary headwinds, we do not see a significant impact on its stock in the short term, since the company has been navigating the global supply crunch better than many of its peers.

On the other hand, assuming that AAPL launches its AR/VR glasses by 2023/ Apple Car by 2025 and started deliveries by 2025/ 2027 respectively, we may also expect a massive upwards rerating of its revenue growth moving forward.

In the meantime, we encourage you to read our previous article on AAPL, which would help you better understand its position and market opportunities:

• What The End Of The Epic Battle Means For Apple And Google
• Apple: What You Should Know About Its Rumored Subscription Plans
• Apple (And Alphabet) Are Butchering Meta's Future Growth

So, Is AAPL Stock A Buy, Sell, or Hold?

AAPL 3Y EV/NTM Revenue and P/E Valuations

S&P Capital IQ

AAPL is currently trading at an EV/NTM Revenue of 6.23x and NTM P/E of 25.97x, comparatively in line with its 3Y mean of 5.4x and 25.26x, respectively. The stock is also trading at $166.02 on 4 May 2022, down -10% from its 52 weeks high of $182.94, though at a 35.8% premium from its 52 weeks low of $122.25. With FQ3'22 pessimism somewhat priced in, consensus estimates also rate AAPL stock at near fair value now, given its stellar financial performance and sustained robust demand.

AAPL remains an excellent long-term hold, and will definitely be further valued as a leading automotive company in the future, similar to TSLA's current elevated valuations of EV/NTM Revenue of 10.27x and NTM P/E of 74.76x. However, given the temporary headwinds from the ongoing lockdowns in China and consequently, the potential FQ3'22 underperformance, we advise investors to wait for a slight retracement, while waiting for its post FQ2'22 earnings rally to be digested.

Therefore, we rate AAPL stock as a Hold for now.

Disclosure: I/we have a beneficial long position in the shares of AAPL, QCOM, TSLA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.