Is Apple’s Open Secret Car Project Even Worth It?

Tesla (Nasdaq:TSLA) founder Elon Musk has said Apple’s plans to make a competing electric car is an “open secret.” He cites how Apple (Nasdaq:AAPL) has hired over a thousand engineers, making it difficult to keep their plan under wraps. However, Elon Musk isn’t threatened by the most valuable company in the world, and perhaps for the same reasons I am not as optimistic about the future of Apple entering the automotive market.

First Concern – It doesn’t seem worth the risk

Not everybody invests in Apple just for growth, but they invest because the company turns big cash flow, and we can thank Apple’s incredible 30.5% operating margin for that. Tesla, a likely competitor, has a double digit negative operating margin. Honda’s (HMC) margin is 4.9%, Ford’s (F) is 4.1%, and GM’s (GM) is 2.9%. It’s difficult to imagine how Apple would be able to compete with the auto manufacturing industry, which has an operating margin average of 6.5%, or at least any time soon. Apple would be entering the car market late, even electric car manufacturing. This means a significant amount of money would need to be invested to build and distinguish themselves from competitors. And what that equates to is a lot of negative cash flow from their car manufacturing business for a long time.

Now let’s pretend the business model works in the long-term. Let’s say that Apple is able to turn a massive operating margin like that of other established luxury car manufacturers, such as Ferrari (NYSE:RACE) who has an Operating Margin of 17.7%. But Ferrari’s sales are a little low, so let’s use Tesla’s sales of $3.788 billion for the TTM. Applying Ferrari’s Operating Margin to Tesla’s sales would create operating income of $670 million. Now $670 million would be amazing for Tesla or Ferrari, but for Apple it equates to less than 1% of their current operating income, making an insignificant impact on their bottom line given the risk.