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Will Cars Add $400 Billion To Apple's Top Line?

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This article is more than 7 years old.

Apple has a growth problem. Can cars solve it? No way.

But that has not stopped Morgan Stanley from predicting that cars will add $400 billion to Apple's top line by 2030. For all that, Morgan Stanley expects Apple stock to rise a mere 20% to $120.

Before getting into why anyone who remembers this prediction 14 years from now is likely to snicker, let's look at the importance of capabilities to competitive success.

Capabilities make the difference between winning and losing in the battle for market share.

To take a simple example, in basketball, the winners tend to be great at skills which I completely lack -- such as being tall, fast, good at hitting the basket from far away and a whole host of other skills that I don't even understand.

When it comes to business, the capabilities needed to win tend to be different in different industries.

But Apple was able to build four capabilities that enabled it to carve out a significant share of three crowded industries in a row. Specifically, Apple's iPod took share in the MP3 player market; its iPhone took a big piece of the cell phone market; and its iPad gained tablet prominence.

In each industry, Apple used four capabilities to win:

  • Design. It designed products that offered consumers better features and benefits than rivals,
  • Marketing. Through advertising and retail stores, Apple marketed and serviced the products more effectively;
  • Supply Chain. Its partnership with Foxconn enabled Apple to manufacture the devices with high quality and low unit costs; and
  • Content Partnering. Its ability to partner with content -- e.g., music and video -- and connectivity suppliers -- e.g., AT&T and Verizon -- led to killer apps -- such as iTunes and the App Store -- that made the hardware more useful to consumers.

While cars are a huge industry in which Apple does not compete, the question for investors is whether Apple can use these capabilities to gain a significant share of the market.

Morgan Stanley argues that Apple is targeting the $2.6 trillion so-called shared mobility market -- think the cars and vans used by Uber drivers.

Morgan Stanley believes that by 2030 Apple will own 16% of that market -- the same as its iPhone share -- resulting in $400 billion of revenue and $16 of earnings per share for Apple.

That is a huge amount of revenue -- representing over twice Apple's $150 billion of current iPhone revenue, according to Bloomberg.

Morgan Stanley argues that since Apple is spending more on R&D than incumbent automakers -- $5 billion between 2013 and 2015 (it thinks most of that is for cars) compared to $192 million for the incumbents, Apple will end up with at least 16% of the shared mobility market.

What is in the water at Morgan Stanley to make those analysts reach such a specific and poorly defended conclusion?

Will the capabilities that got Apple to 16% of the smartphone market be of any help in the car business?

I think the answer to that is probably not. After all, the skills needed to design, manufacture, distribute, and service a handheld device are very different than what it takes to do the same for a car.

But wait. Apple invested $1 billion in a Chinese ride-sharing company! It's exploring charging stations for electric vehicles! There is rampant speculation about a Project Titan for which Apple is rumored to have plans to hire 1,800 people by 2019!

I am skeptical that Apple can design and build an electric vehicle that will be safe enough to drive and wildly popular with consumers.  Why will Apple be able to succeed in such a different business when it could not even use its existing capabilities to build a watch that people find useful (analyst KGI noted that “the lack of useful apps, limited battery life and the Watch’s iPhone requirement are impeding sales”)?

Another problem is that incumbent automobile makers control huge chunks of the market already. According to Statista, these rivals include General Motors (17.7% 2014 U.S. market share), Ford (14.5%), Toyota (14.5%), Fiat Chrysler (13.2%), Honda (9.2%), Nissan (8.5%).

Moreover, many of these companies are taking steps to adapt to the shared mobility market already. Ford and GM are among the incumbents that are following in the footsteps of Daimler and BMW in setting up subsidiaries to target the shared mobility market, according to Frost & Sullivan.

In short, incumbent car companies will not give up their market share without a fight and it's not at all clear that Apple can build a car that would survive regulatory scrutiny and appeal to consumers that they would line up -- as they did for the Tesla Model 3 last month -- to order so many of them that Apple would become the second largest car company in the world.

But that's what Morgan Stanley is suggesting will happen by 2030.

If you believe that, I would be happy to sell you the Empire State Building.