Apple Should Build an iCar. Here’s Why.

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Speculation about an

Apple

electric car refuses to die—EV’s are too cool, too exciting, and the computer giant has its hand in so many pots that the rumors just make too much sense. But should it build an electric car? The short answer is yes, according to Evercore ISI analyst Amit Daryanani.

Talk of an iCar car resurfaced in December after a report by Reuters that Apple (ticker: AAPL) wanted to introduce an autonomous EV by 2024. Apple declined to comment on its car plans twice.

Apple’s entry into the automotive market would be huge. Apple stock is worth more than the combined market capitalizations of all traditional auto makers combined. Investors can throw in automotive suppliers and Apple is still more valuable.

Apple has been tinkering with cars since at least 2014, but have yet to pull the trigger, possibly because electric- and autonomous-vehicle technology wasn’t ready for prime time.

Now it is, thanks to

Tesla

(TSLA)—the only auto maker with a valuation in the same stratosphere as Apple. Its success has convinced investors EV tech can be profitable.

Autonomous-vehicle technology, too, is proliferating at an accelerating rate.

General Motors

’ (GM) Cruise autonomous driving took in $2 billion from

Microsoft

(MSFT) and other investors this past week, valuing the unit at about $30 billion. Cruise, along with

Alphabet

(GOOGL), Tesla and others believe they can have “level-four autonomous vehicles,” which means the car can do everything under certain conditions on the road, in a couple of years. Level four autonomy would enable robotaxi services to become viable.

But the car industry isn’t as profitable as the smartphone industry so even though the car market is huge—larger than even smartphones—Apple might think twice about launching a car.

Profits won’t be a problem, according to Daryanani. The “aggregate mobility margin will not be dilutive in the long-run,” writes the analyst. He believes Apple’s ability to sell software services will boost margins beyond traditional auto makers.

Daryanani even put numbers on the Apple iCar program. He sees it generating $36 billion in sales and 30 cents in per-share earnings “in the long run.” He doesn’t define the long run. But $36 billion would make Apple iCar larger than Tesla is today.

Daryanani covers Apple, not car stocks, and he rates shares a Buy and has a $160 price target for shares. He believes Apple’s entry into the car market will make the car a software product on wheels like the iPhone made phones a platform for apps and mobile computing.

To make it happen, Daryanani believes Apple will partner with a contract manufacturer—like it does with smartphone—to build Apple’s hardware designs. That’s the first problem Apple might run into. The contract manufacturing industry for cars is far smaller than it is for phones. That means the contract manufacturers would likely be existing manufacturers—like General Motors.

That would be a boon to GM investors, but Apple picking partners sets up a winner take all scenario for the traditional auto industry.

There is one auto maker that is as profitable as Apple. It’s

Ferrari

(RACE). Apple’s recent Ebitda, short for earnings before interest, taxes, depreciation and amortization, came in at 29%. Ferrari posted Ebitda margins of about 33%. Upscale strategies can work, but Ferrari only sells about 9,000 ultra-luxury vehicles a year. That’s about 0.01% of the automotive market. Apple will likely want to be bigger than that.

It might not be all doom and gloom for the traditional industry if Apple enters the car race. It might signal that the era of a car as a software-enabled product is here. That means growth for the industry. And one reason car makers trade low price-to-earnings ratios is there is little industry growth. GM, for instance, trades for about 9 times estimated 2021 earnings. The

S&P 500

multiple is greater than 20 times.

An iCar is still years away. Investors will have to pay attention though. Apple is huge. What’s more, partnership activity will drive traditional auto stocks. How it all turns out, however, is still too soon to tell.

Write to Al Root at allen.root@dowjones.com