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Nov. 3, 2021, 8:16 a.m. EDT

Here’s the math for Tesla’s stock price if it becomes the Apple of car makers

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By Andrew Dickson

Fans and shareholders of Tesla are making stronger and louder arguments about the future of their favorite company. In them, they draw analogies to one of the most successful brands and businesses in the history of capitalism. They suggest that automaking may go the way of handset manufacturing and that – for Tesla /zigman2/quotes/203558040/composite TSLA +1.75% – there is a strong resemblance to the Apple /zigman2/quotes/202934861/composite AAPL +0.51% vs. Nokia/Blackberry/Ericsson/Motorola dynamic.

For those that don’t know, in the early 2000s it was unimaginable that these legacy mobile phone manufacturers could disappear. In 2006, Research in Motion (RIM), the company making BlackBerrys, lost a patent suit against NTP and a U.S. District Court judge slapped an injunction on sales. The Defense Department stepped in, claiming that a Blackberry injunction was a threat to national security. Meanwhile, industry leader Nokia held a 40% market share and by the end of 2007 sported a $230 billion market cap.

But something else happened in 2007.

Steve Jobs introduced the iPhone.

And that changed the game for Nokia, Blackberry and the entire industry, forever.

Coincidentally, Jobs introduced that iPhone seven months after Tesla introduced the Roadster at the San Francisco International Auto Show. Fast forward to 2021, and the bulls are suggesting that Apple’s overwhelming success in handset manufacturing can be mirrored in automobile manufacturing by Elon Musk’s Tesla.

For this to happen, let’s first assume that within 15 years buyers will demand a broadly similar “form factor” for any vehicle. Today, there are 250 brands of cars sold to fit all appetites and budgets, and perhaps over 1,000 trims. Meanwhile, thanks to the iPhone, handset hardware has gone from a myriad of styles, sizes and forms to basically one.

Similarly, let’s imagine that the production and value of automobiles and light trucks will become less about the style or performance that is demanded and instead mostly about the software inside the vehicle.

Finally (and this is a huge debate, but) let’s presuppose that Tesla will have better software – most importantly better autonomous driving capability – than any other vendor or manufacturer, whether in Silicon Valley, Detroit, Wolfsburg or elsewhere.

In other words, let’s assume that Tesla is going to become the Apple of automakers.

To do this, we need to ignore that Apple is not just a handset manufacturer. In the first three quarters this year, it reported over $150 billion of iPhone sales, which represented 55% of total sales. It also reported sales from the “Services” segment, which included sales from advertising, digital content, AppleCare and other lines. If we assume all that revenue was driven by the iPhone (even though not all was), then we get the iPhone representing about 65%-70% of Apple’s sales.

This implies Apple has a substantial business (about $110 billion this year) selling Macs, iPads, wearables and accessories too. So in our “Tesla is Apple” analogy, we need to assume that Tesla will make similar extensions into new products.

We also need to ignore that most of the profit for Apple in handsets comes from mobile advertising and app sales, much of which Apple reports in that services segment noted above. Again, to stay in our framework, we also need to believe that Tesla would generate something similar via its over-the-air updates or its own app store.

Making all these assumptions, then future margins in “automaking” – for at least one manufacturer – could theoretically start trending up toward the margins generated today by Apple.

So in terms of handset market share, people around the world are going to buy approximately 1.4 billion handsets this year, and the average selling price will be about $320. Apple has about 16% of the global market, and will sell about 225 million iPhones.

Just guessing here, but if these iPhones are sold at an average price of $890, then the average price of all the other phones sold in the world needs to be about $125 for the math to make sense. And because Apple can sell its iPhone at such a huge premium and produce remarkable revenues from advertising and app store sales, it generates a whopping 24% earnings margin.

In comparison, Volkswagen /zigman2/quotes/203434344/delayed XE:VOW3 -0.58% /zigman2/quotes/210463125/composite VWAPY +2.95% , which started operations in 1938, has worked its way up to a global market share of 12.0% and generates net income margins of 5.0%.

Toyota /zigman2/quotes/203803129/delayed JP:7203 +1.38% /zigman2/quotes/200537742/composite TM -0.32% , which also started operations in 1938, also has a global market share of 12.0% and generates even better net income margins of approximately 7.0%.

Nokia, for what it is worth, generated 14% net margins before the iPhone changed the game.  In other words, even before Apple showed up, handset manufacturing was over twice as profitable for market leaders as making cars.

Anyway, folks around the world will buy about 75 million new cars this year, and at an average price of $30,000 (ballpark) this works out to over $2.2 trillion in sales. This is about five times larger than the handset market, which will come in at about $450 billion. Toyota and Volkswagen are the largest – and best in class – scale automobile manufacturers in the world. Other groups, including Ford /zigman2/quotes/208911460/composite F +0.68% , Stellantis (FCA/Peugeot) /zigman2/quotes/204248628/composite STLA +0.79% , Daimler /zigman2/quotes/201850364/delayed XE:DAI -0.76% , General Motors /zigman2/quotes/205226835/composite GM -1.08% , Honda /zigman2/quotes/200490352/delayed JP:7267 +2.13% /zigman2/quotes/207173990/composite HMC -0.65% , BMW /zigman2/quotes/202432319/delayed XE:BMW -0.63% and many others also have significant share.

This year, Tesla will sell about a million cars, representing a global market share of 1.3%.

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