Will Apple Inc. (AAPL) Remain The Smart Money’s Darling If It Goes Automotive?

Similar to how very few consumers will disagree that Apple Inc. (NASDAQ:AAPL) has some of the best products on the market, few investors will disagree that Apple is one of the best companies to invest in. The stock has been steadily climbing for the last several years, making Apple the company with the largest market cap in history. It still trades relatively cheap, at 12-times forward earnings, compared to 17 for the S&P 500. Apple Inc. (NASDAQ:AAPL) also has a huge pile of cash that it can use to buy back shares and pay out dividends, which is one of the main reasons that investors like Carl Icahn are so fond of the company. For the last several months, there have been rumors and hints that Apple is interested in going into the automotive business, with Tim Cook recently declaring that a “massive change” is coming to the auto industry.

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In addition, many outlets have previously reported that Apple Inc. (NASDAQ:AAPL) was poaching engineers from Tesla Motors Inc (NASDAQ:TSLA), to which Elon Musk replied by saying that Apple is “The ‘Tesla Graveyard.'” These words sparked a new wave of noise around Apple’s intentions to develop a car and Musk himself later tweeted: “[…] I don’t hate Apple. It’s a great company with a lot of talented people. I love their products and I’m glad they’re doing an EV.”

While the fans of Apple’s products might be excited about the prospects of an Apple car, it’s not so certain that investors will share the same sentiment. So far, Apple Inc. (NASDAQ:AAPL) was one of the most popular companies among hedge funds and other smart money investors that we track, as it was included in the equity portfolios of 144 funds from our database. One of the main problems that might concern investors is whether or not Apple should diversify into the automotive industry while it is still lagging in some segments of its current businesses.

Even though Apple Inc. (NASDAQ:AAPL) has a wide range of products it is essentially a one-product company, since the iPhone accounts for over 60% of its total sales, according to the last 10-Q report it filed with the SEC. Out of $50 billion worth of sales in the last reported quarter, sales of iPhones represented some $32 billion. The sales of the iPhone increased considerably, by 59% on the year during the quarter, but, at the same time, the sales of iPads fell by 23%. And whether or not Apple will manage to maintain the same sales growth for the iPhone in the future is rather uncertain, since the competition is catching up slowly but steadily; maybe not in the U.S, but in China for sure, which represents Apple’s second-largest market.

In this way, it seems that Apple would be better off focusing on solving the problems with its current businesses and should make sure that it can stay in front of competitors for a long time, before it diversifies into other businesses, especially automotive, which requires a huge investment. Apple has tons of cash to spare, but investors would probably like to see a large part of it redistributed to shareholders in dividends and buybacks rather than spent on the development of a car.

Tesla Motors Inc (NASDAQ:TSLA) encountered numerous roadblocks while developing its first vehicle, the Roadster, followed by the release of the Model S, which also went through an arduous process. Apple can cover the development of the car with sales in its other segments, but again, with high prices and an increasing quality of products offered by competitors, if the economic situation worsens, Apple’s sales will most certainly plummet as consumers switch to cheaper alternatives.

The timing for the release of the car might also be a problem for Apple. The tech giant plans to release a car in the next four years, according to previous reports. However, we are already in the era where a fully-electric vehicle is already passing from being something innovative to something traditional, thanks to Elon Musk. Aside from Tesla, which has the best EV so far, BMW’s i8 and i3 models are also pretty good. Volkswagen, which is in the middle of the biggest emissions scandal, has also recently expressed its commitment to switch towards electrification in the near future. Apple Inc. (NASDAQ:AAPL) was the first with the iPhone and the iPad, but it will have to come up with something really cool in order to capture attention and disrupt the auto industry. A self-driving car will also not be considered an innovation by the time Apple completes the project, since Tesla has made a significant leap in this area and Alphabet Inc (NASDAQ:GOOGL) is also on the verge of releasing its own self-driving car to the mass market.

At the end, we should remember the words of short-seller Jim Chanos:

“[…] what Tesla had is innovation and a head start in this market that other companies are now catching up to. And they have to become a car manufacturer. And becoming a car manufacturer is a lot more difficult than becoming a high tech darling,”

The transition towards being a car manufacturer will be difficult and expensive for Apple and it’s not clear whether investors will be ready to support it. After all, smart money investors consider that Tesla Motors Inc (NASDAQ:TSLA) is overvalued at its current levels and has a long way to go before their sentiment is likely to change.

Disclosure: None