Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
Last week, Apple announced another amazing quarter of financial results. They reported almost $50-billion (U.S.) in sales, a whopping 33-per-cent year-over-year revenue growth and net profit of $10.7-billion. We'll come back to that enormous profit number in a moment.
It was also the first time Apple's new watch was included in the financial results. The company didn't disclose specifics on Apple Watch sales, but most reasonable estimates seem to put watch revenue at about $1-billion for the quarter. That's only about 2 per cent of Apple's total revenue, so not that big of a deal to the stock right now. But it's early days. The app store for the Apple Watch hasn't launched yet, and until we see what developers come up with it's hard to know how big this product could be.
But even if it becomes a huge success, I have a hard time imagining the Apple Watch could be so big of a hit that it eventually allows Apple to double it's $700-plus-billion market capitalization.
I think the time has come for Apple to make even bigger decisions. The company has about $150-billion in cash (net of debt) and is spitting out tens of billions of dollars in profit a year. Even with stock buybacks and dividend increases, Apple is in the enviable position of being able to look at almost any business in the world without facing any capital challenge whatsoever.
In February of this year, rumours started swirling about Apple doing R&D on electric cars. At first I couldn't believe it, but now it looks to be very real and I'm starting to think it just might be a brilliant move. I've watched Tesla Motors show the world how incredible battery-powered cars can be. I've owned their Model S electric sedan for over a year now. Last week, Bloomberg columnist and wealth manager Barry Ritholtz wrote that gas-powered cars are "the walking dead who have not realized they are goners."
I imagine Apple sees this same development. They see what Tesla has done with limited capital. More important, they see the rest of the automobile industry doing next to nothing to address the electric-car future. Cars are much more sophisticated when it comes to software, while electric cars are simpler and more reliable mechanically. Apple is already doing software for cars called CarPlay, so why not at least consider the much bigger move of designing entire cars?
Apple has seemingly infinite capital and a powerful reputation thinking differently and launching the best darn products in their category. The transition toward electric cars gives Apple a chance to deploy some of its cash to jump into a brand-new industry as a trusted, established leader. Some company has to be the top dog in electric cars and I don't believe it will be Ford, General Motors, Nissan, Toyota or any of the existing big car brands. I believe Apple should challenge Tesla, or ultimately acquire them.
BlackBerry co-founder Mike Lazaridis once told me the car is the ultimate mobile accessory. It sounded partly like a joke, but it was truly a serious comment. Internet-connected electronic devices are a big part of our life and so is driving. They fit together naturally. The big car companies are too slow and highly risk averse. They're not moving fast enough to roll out electric cars and I think there is a real chance that many of them will find themselves in big trouble over the next decade. Apple, on the other hand, has no legacy technology or infrastructure to slow them down, and billions of reasons to look for new markets to deploy its cash.
If Apple enters the car business it'll surely lose money in the beginning, and the faster it moves the more it could negatively affect the company's stock price. But I hope they do enter the car market and do move quickly. Apple doesn't worry about Wall Street and there really would be no other reason to move slowly once it commits to this direction.
An Apple Car, to me, is a lot more exciting than an Apple Watch. I look forward to holding the stock for many more years and watching this develop.
Disclosure: I own Apple and Tesla shares both personally and in my Strategy Lab portfolio.
Chris Umiastowski