Report suggests that Apple is more likely to make add-on devices for electric cars rather than producing vehicles themselves
This interesting report which crunches the numbers of Apple making its own EVs concludes with the statement: "So the key question here is not, does Apple have the technical know-how to enter the car business? Of course it does... Rather, it’s what is Apple’s financial model for the car business? The fact that Apple likely wants to see gross margins of 40% suggests that the company is more interested in making add-on devices or software services for electric cars than it is actually operating a production line."
Nice margins. But not as nice as Apple's. Porsche

Apple is building an electric car.

Or at least, Apple is behaving very much like a company that is building a car: hiring senior executives from Fiat Chrysler, running a secret garage, poaching employees who know about electric car batteries, and building some sort of manufacturing facility in Ireland.

Piper Jaffray analyst Gene Munster even thinks Apple should just get it over with and buy Tesla, the top maker of sexy electric cars.

But there is a huge problem with all of this: Car manufacturing would ruin Apple's profitability. It would tank the company's stock, which in the year 2000 traded at around $5.00 and now sells for ... $123.00.

In other words, making cars would require a complete financial remodelling of the entire company, turning it from a high-end purveyor with a brand that commands premium prices into a commodity business, managing its margins against the price of steel. (It would keep the brand of course.)

Let's run some numbers.

First, what would Tesla's numbers do to Apple if CEO Tim Cook bought Elon Musk's awesome car company?

Tesla Q1 2015

Revenues: $940 million

Gross profit: $260 million (28%)

Operating profit: -$103 million (-11%)

Tesla is able to sell a car for 38% more than it costs to make, giving it a gross profit margin of 28% of its revenues. But after Tesla pays for all its other operating costs — R&D, sales, salaries, etc. — it loses money.

In this Friday, June 22, 2012 file photo, Tesla CEO Elon Musk walks past the Tesla Model S after a news conference at the Tesla factory in Fremont, Calif AP Photo/Paul Sakuma, File

Apple Q3 2015

Revenues: $50 billion

Gross profit: $20 billion (40%)

Operating profit: $14 billion (28%)

Apple is able to sell its devices for 66% more than they cost to make, giving it a gross profit margin of 40% of its revenues. More importantly, after it has paid all its operating costs, it still takes home 28% of that total revenue.

So, instantly you can see that if Apple bought Tesla, Tesla would ruin Apple's margins and hurt its earnings-per-share, severely damaging the stock. And that is despite Tesla's underlying profits.

Mike Nudelman/Business Insider

OK, so Tesla is a new company and maybe hasn't got the benefits of a mature car-manufacturing operation. Let's look at Ford. That company has been making cars for a century. Surely they know how to get a margin out of it:

Ford Q1 2015

Revenues: $34 billion

Gross profit: $5.2 billion (15%)

Operating profit: -$869 million (-3%)

With Ford, it's even worse. Ford can only sell cars for 18% more than they cost to build, and its gross profit is 15% of its revenues. It is not profitable on the bottom line. So if Apple does what Ford does, it would be ruinous for Apple.

Gary Cameron/Reuters

Obviously, Apple is not Ford. Ford is a mass-market brand and Apple is the luxury brand of tech. So let's look at a luxury carmaker that ought to be able to attract high prices and high margins for its wheels:

Porsche FY 2014

Revenues: €17.2 billion

Gross profit: €4.3 billion (25%)

Operating profit: €2.7 billion (16%)

Porsche AG can sell a Porsche for 34% more than the steel and parts it costs to build, and its gross profit is 25% of its revenue. It's a lot healthier than Ford, but its margins still are way, way below Apple's. If Apple sold Porsches it would dilute Apple's profits and crush the stock. Porsche might be a great acquisition for any other car company, but it would be bad for Apple.

A worker inspects the new Porsche 911 GT3 RS sports car in the final check area at the Porsche factory in Stuttgart-Zuffenhausen March 10, 2015. REUTERS/Michaela Rehle

Now, Apple has $15 billion in cash on its balance sheet. (And it has a lot more cash available in securities and short-term assets that function like cash.) So it could plunge into the car business if it wanted to. And if it sold cars at high prices like Porsche, it could make money.

But it would suddenly be in a business where the profits were around 16% of revenues at best. Right now its business is 28% of revenues — after tax!

So the key question here is not, does Apple have the technical know-how to enter the car business? Of course it does. That is the easy bit.

Rather, it's what is Apple's financial model for the car business? The fact that Apple likely wants to see gross margins of 40% suggests that the company is more interested in making add-on devices or software services for electric cars than it is actually operating a production line.