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Amid reports that Apple is building out its "Apple Car" production capabilities with Kia, Morgan Stanley analysts said that investors are likely underestimating the impact Apple could have on the market.
In a note to investors seen by AppleInsider, a trio of analysts from Morgan Stanley's Asia Pacific Auto, U.S. IT Hardware, and U.S. Autos and Mobility teams shared their thoughts on recent rumors of Apple investing billions in Kia to produce its self-driving car.
Analyst Katy Huberty notes that Apple has a history of funding the build-out of manufacturing capabilities for new products. Before the iPhone launched, Apple spent less than $1 billion annually in capital expenditures. A decade later, that number is now $12 billion, with the largest share being manufacturing equipment.
Huberty also notes that investors are likely to underestimate the financial impact of Apple entering the electric car market. She points out the effect Apple has had on addressable opportunities when it enters other markets.
When it hit maturity, the iPod shipped more than three times the annual peak units of its predecessor. Less than a decade after the iPhone launched, smartphones surpassed its peak future market size. Apple Watch shipments as of 2021 currently exceed the entire Swiss watch market
"In other words, applying a market share figure to the current EV market forecast is likely to vastly underestimate the size of Apple's car business in the future," Huberty writes.
She also maintains her position that Apple is entering the car market because of its combination of hardware, software, and services and the fact that it could create a better experience. "We believe Apple would approach the market with the same vertical integration it leverages in other markets," she says.
Asia Pacific Auto analyst Young Suk Shin added that if rumors of Apple investing in Kia are true, the Cupertino tech giant is "effectively putting its own capital for capital expenditures, while Kia gets to manufacture."
"From that perspective, it can be seen as a better option, but we don't believe this changes the thesis that Kia ends up being an outsourcing firm. The Apple halo-effect/sentiment is overtaking outsourcing concerns for now," the analyst said.
Adam Jones of Morgan Stanley's auto team says that he doesn't believe investors are prepared for the second order impacts of an Apple entrance into the e-mobility and internet-of-cars space.
"We believe contemplation of an Apple entry into the car market will expand investor thinking around the role of the network including the business model of recurring, software enabled platform revenue (installed base, attach rate, ARPU valued at SaaS multiples)," Jones writes.
Like Huberty, Jones believes that an "Apple Car" could materially expand the broader electric vehicle market. Jones' current 31% EV penetration forecast for 2030 doesn't not consider the Apple self-driving car.
Huberty maintains her 12-month AAPL price target of $164. It's based on a sum-of-the-parts model with a 6x enterprise value-to-sales (EV/Sales) multiple on Apple's product business and a 13.1x EV/Sales multiple on Services. That results in an implied 7.5x target 2022 EV/Sales multiple and a 34x target enterprise-value to free-cash-flow multiple.