Apple bulls should hope a car is a ways off
Entering market would likely accelerate Apple’s negative profit trend
Investors betting that an Apple car will be a future revenue growth driver for the company may also want to start hoping one doesn’t get here too quickly.
Apple’s plunging profit margins don’t need further downward pressure, and entering the car market won’t help them.
Even as Apple sales for the June quarter slightly beat Wall Street estimates, sending its shares higher, its latest financial report showed a massive drop in profitability.
The company’s operating income plunged 28% year over year to $10.1 billion, nearly double the 14.6% drop in revenue.
That pushed its operating margin down in a big way, to 23.9% of revenue from 28.4% a year earlier.
Net income dropped 27%, as the average sales price of an iPhone fell almost 10%, to $595.
Without a lower tax rate and a lower share count, Apple’s pershare earnings would have dropped a lot more than 43 cents year over year.
None of that mattered to those who bid the company’s stock higher Wednesday, however.
As we pointed out this month, technology investors are looking past the industry’s ongoing profit declines and toward U.S. monetary policy.
With the Federal Reserve signaling no imminent rise in interest rates and Treasury yields near historic lows, dividend-paying tech stocks like Apple look attractive vs. government bonds.
That’s firmly supporting the bid for Apple shares, confounding short-sellers who bet against the stock ahead of earnings.
Yet while retail investors would be foolish to fight the Fed in the short term, Apple’s falling profits will ultimately matter to long-term investors — at least those who care about value.
Entering the car market quite likely will accelerate the negative profit trend, given that the auto industry’s major players have operating margins even lower than Apple’s latest figures.
In their most recent financial reports, for example, Toyota and Ford reported operating margins of 10% and 9.8%, respectively. Monday, The Wall Street Journal, citing sources close to the company, said Apple has brought back former executive Robert Mansfield to run its car program, dubbed “Project Titan.”
The project, which Tesla CEO Elon Musk has called an “open secret” in Silicon Valley, never has been confirmed by Apple.
Google, Tesla and others are also moving toward the same market for tech-laden or even fully-automated vehicles.
Last weekend, the tech news site The Information reported that Apple’s car research efforts had been delayed and that the company won’t be in the auto market for at least another five years. Perhaps that’s why Mansfield has been brought in.
Given the current trajectory of Apple’s profit margins — and what’s likely to happen to them if and when the company enters the auto business — optimistic investors should hope he isn’t in a big rush to get a car on the road.