Apple Car Rumors Suggest AAPL Is Really Doing This

Speculation about a potential Apple car again ran wild over the weekend, sparked by a report in The Guardian that the iPhone-maker had found a place where it could secretly test it.

Apple Inc. (Nasdaq: AAPL) stock got a slight lift from the rumors, rising more than 1% by mid-day today (Monday).

apple"Apple is building a self-driving car in Silicon Valley, and is scouting for secure locations in the San Francisco Bay area to test it," The Guardian declared. "Documents show the oft-rumoured Apple car project appears to be further along than many suspected."

The UK-based newspaper said that Apple is in talks with officials from GoMentum Station, a 2,100-acre former naval base in the San Francisco area. Not only does the facility have 20 miles of paved highways and streets, but public access is forbidden. It's actually guarded by the U.S. military.

In other words, it's the ideal place to test an Apple car.

The last wave of Apple car rumors came in February, highlighted by The Wall Street Journal's revelation that the Apple car project does indeed exist under the code name "Project Titan."

So it's clear Apple is working on something related to the auto industry, but unwise to assume that Apple will soon join the ranks of U.S. automakers like General Motors Co. (NYSE: GM), Ford Motor Co. (NYSE: F), and upstart Tesla Motors Inc. (Nasdaq: TSLA).

It's tempting to think a self-driving, all-electric Apple car is in the pipeline. And without a doubt, Apple has the financial resources to pull it off. But strategically, it doesn't make sense.

For one thing, car manufacturing is an extremely complex business. Starting from scratch requires hundreds of millions of dollars in capital for factories, engineering, design, tools, and certifications. And it requires a sophisticated supply chain for the thousands of parts that go into a car.

Not that AAPL couldn't swing it. But the company outsources almost all of its manufacturing now. Running an auto factory is not in Apple's DNA.

But that's not all...

An Apple Car Isn't Profitable Enough

Then there are profit margins, or lack thereof. GM's operating margin was a measly 1.8% last year. Apple's operating margins were over 30%. True, an Apple car would command a premium, but a luxury brand like Porsche only managed an operating margin of 20%.

Even Apple's powerful brand and enviable pricing power could not make up that difference.

So becoming a full-blown automaker would eat into Apple's cherished margins, something Wall Street would frown upon even if the Apple car sold well.

And it could take years to turn a profit.

Tesla, perhaps the closest thing to a model of what an Apple automaking operation might look like, reported its first profit ever in Q1 of 2013 - nearly 10 years after the company was founded and seven years after it started selling cars.

Then you have the problem of how and where an Apple car would be sold. Obviously, the Apple car wouldn't fit in a typical mall-based Apple Store, although the company could take orders via its retail locations. Still, most people will want to see an Apple car before they drop $50,000 or $70,000 or $100,000 on one.

Tesla's route of having customers buy directly from the company ran into legal problems in several states. And establishing a network of dealerships would be difficult, costly, and cumbersome.

All of which argues for the Apple car being something car-related without actually being a car.

How AAPL Will Avoid the Pitfalls and Make a Killing in the Auto Market

Instead of building an entire car with all the headaches that go with it, Apple will instead build a smart car system it will sell to the world's big automakers.

An Apple smart car system would focus on high-tech features such as driverless car technology, electric car technology, and of course the integration of GPS and entertainment options.

The whole shebang will also integrate with the iPhone, because Apple won't venture into any business that doesn't in some way tie back to its powerful ecosystem.

By selling a platform to existing, established automakers, Apple won't need to spend as much money or take as much risk. That will help preserve margins.

Plus, this strategy turns what would have been powerful, established competitors into partners.

No doubt the automakers likewise would rather have Apple as a partner than as a rival. Those that elect to offer the Apple smart car system will get the benefit of using the Apple brand in their marketing.

Some may find a smart car platform disappointing compared to a full-fledged Apple car. But the strategy better plays to Apple's strengths and ultimately is the more profitable road.

The Bottom Line: Reports that Apple has been seeking to test an Apple car at a secretive facility in the San Francisco area has revived rumors that a full-blown Apple car is just a couple of years away. But it's much more likely that Apple is building a smart car platform it will sell to the world's automakers. That way AAPL gets the benefit of a beachhead in the auto industry without the huge investment and risk that would go along with building a car from scratch.

Apple Stock Still Going to $200: Since Apple reported that sales of the iPhone missed expectations in the June quarter, Apple stock has slipped about 12%. But in its fuss over one quarterly number, Wall Street is missing the big picture. Here's why AAPL stock is stronger than it looks right now...

Follow me on Twitter @DavidGZeiler.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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