Apple Cancels Its Car Project: Good Or Bad News? (NASDAQ:AAPL)

Introduction

A decade of rumors and sneak peeks has come to an end as news came out that Apple (NASDAQ:AAPL) is canceling its Project Titan, the Apple electric car. Around 2,000 employees have been told they will either be redeployed to the Machine Learning and AI unit, while others will be laid off. This will surely impact Apple’s financials almost immediately, leading to savings of roughly $1 billion per year.

Surprisingly, this news has not caught a lot of attention on Seeking Alpha. Moreover, what was once among Seeking Alpha readers’ favorite stocks, seems to be facing several headwinds, with China-related bad news and lagging market sentiment sinking the stock to its lowest levels since May 2023. On top of this, investor confidence was shaken once it was disclosed that Warren Buffett’s Berkshire Hathaway trimmed its stake in Apple by roughly 1%.

In this article, I would like to show why, amidst several concerns around recent flattish growth for Apple, the winding-down of Project Titan should be welcomed as good news by investors.

“A Brutal Space”

First of all, Apple is widely recognized as the manufacturer of the best and most wanted products in their category, be it smartphones, laptops, or other wearable devices. As a result, Apple can only enter a new market if it is confident enough to have developed a top-notch product that outcompetes all its peers.

The EV space has been recently defined by Mercedes (OTCPK:MBGAF) as a “pretty brutal space” and I showed how this is the bearer of bad news for companies such as Tesla (TSLA). The list of battery electric vehicles expands month after month and competition is becoming stiff. As a result, Tesla, which has undoubtedly benefited from the first-mover advantage, is seeing its margins shrink rapidly, coming close to those of some legacy automakers.

After seeing its operating margins peak above 15%, the company recently reported operating margins below 10%. Actually, looking at the quarterly breakdown, we see an even worse trend. In Q4 2022, the company still reported operating margins of 16%, in the most recent quarter, it was down to 8.2%, though it improved a bit from the 7.6% reported in Q3 2022.

In any case, the battle in this industry is for margins in the low double-digits. There are, however, two exceptions: Ferrari (RACE) and Porsche (OTCPK:DRPRY). Though I don’t consider them direct competitors one against the other, both companies can have above-average margins. This is easy to understand: they sell luxury vehicles. As a result, we have an EBIT margin close to 19% for Porsche and 27% for Ferrari.

So, the question arises: is this industry really interesting for Apple? Could it have been really accretive to Apple’s outstanding profitability?

Apple’s Profitability

As most investors know, Apple plays in a league of its own when considering its profitability metrics, with only a handful of (usually tech) companies keeping up with these margins.

As we can see from Apple’s profitability grades, we are before a company whose EBIT margin is above 30% and whose ROTC is over 42%.

So, even though rumors were suggesting a price tag of around $100,000 per vehicle, which would have positioned Apple in the same price per vehicle range as Porsche, it would have hardly been possible for the Tim Cook-led company to achieve profits that would have improved its profitability. Even if Apple had been able to sell its electric cars at an EBIT margin of 25%, which is almost as high as Ferrari’s, the company’s overall bottom line would have worsened.

In other words, entering the EV space could have made Apple’s top-line increase significantly, but its outstanding profitability metrics would have been damaged.

True, investors are worried about Apple’s top-line stagnation. But I don’t consider Apple a top-line company as much as other ones. Apple is a free cash flow generating machine. As a result, it needs to invest its capital in endeavors with high foreseeable returns on capital.

Apple Is Already In The Automotive Industry

Even though the dream of an Apple car seems dead, investors should still consider that Apple’s outreach in the Automotive Industry is strong, up to the point some believe every car is already an Apple Car.

Though this may misrepresent a bit the real state of the art of the industry, Apple CarPlay is indeed installed in almost every car, making it a trojan horse into the industry. Through this app, Apple gathers an enormous amount of data, which is key to leveraging the app and monetizing it down the road. So far, it is free. But, as we all know, when an app is free, then the customer is the product.

What investors sometimes overlook is that Apple usually reports its active devices installed base, which surpassed 2.2 billion as of the last earnings report. However, this number considers only the devices Apple directly…