Apple Stockholders Should Be Excited After This Announcement
Sergio Marchionne, CEO of Fiat-Chrysler Automobiles N.V. (NYSE:FCAU) and Apple Inc. (NASDAQ:AAPL) are really working to build a car just as the rumors have suggested. Here’s what it means for Apple stock.
Fiat-Chrysler’s boss, one of Wall Street’s favorite CEOs, is rather certain that Apple will make a car and that the future of the famous company from Cupertino includes a prominent role for automobiles. Speaking to CNBC’s Carlos Quintanilla, Marchionne seemed very convinced of his words simply answering, “yes” to the question, “Do you think Apple will build an automobile?”
“It is a sector where they can show all their capacity for innovation,” he added. (Source: “Ferrari Chairman Sergio Marchionne Speaks with CNBC’s ‘Squawk on the Street’ Today,” CNBC, Oct. 21, 2015.)
This Could Be the Next Big Thing for Apple Stock
Marchionne thinks that Apple will take this step because it is a sector that highlights its entire innovative prowess. It is as if the cars will help drive Apple’s image as a technology heavyweight. However, said Marchionne—and this is the key consideration—while Apple may want to enter the automobile game, they may not necessarily be interested in building it.
It is crucial for the iPhone maker to get this right because Apple stock would crash if its venture into the automobile business were to fail. Conversely, if the company gets it right, Apple stock will reach unprecedented altitudes.
“I highly doubt that they are willing to set up a production line,” said Marchionne. In the view of the Fiat-Chrysler’s CEO, Apple will simply entrust someone to build one for them. Marchionne promptly denied having been asked to be the ones asked to make the Apple car, rejecting even the suggestion that “FIAT might be the Foxconn for the production of Apple’s cars […] I do not think I like being compared with Foxconn considering the margins.”
Marchionne visited Apple last summer and had a chat with Elon Musk at Tesla, praising their work. However, Marchionne is not a fan of the electric car. Nevertheless, he has recognized that companies like Tesla Motors, Inc. (NASDAQ:TSLA) or Apple, through their technological push which also includes driverless cars, are forcing a change in the nature of the design and manufacturing of passenger cars. This is said that it “will change the nature of cars and the relationship between supply and demand” over the next five years.
Evidently, Marchionne is keen on raising the value of Fiat-Chrysler stock and refuses to hide his proverbial head in the sand, ignoring the momentous changes and challenges of the automobile industry. Fiat-Chrysler stock is already confronting the future, set to gain from the spinoff of prized divisions and the pursuit of major alliances. Marchionne flatly denied the possibility of helping Apple build an electric car. And Fiat has had much success with its electric power version of the 500 in California and a few other U.S. states. Eddy Cue, one of Apple’s top managers, sits on the Board of Ferrari N.V. (NYSE:RACE), which just launched its IPO on October 21st.
Recall that Ferrari, probably thanks to its close relations to Apple by way of Cue, was the first manufacturer in the world to integrate its media system with Car Play; the software that allows the car to use an iOS smartphone. “We want to get in the car; it is like having an experience on the iPhone.” In other words, it would be unthinkable for Apple to build a car without consulting Fiat-Chrysler, which certainly has an important role in Apple’s plans for its car—the so-called “Project Titan.”
Apple Cannot Build a Car Without a Major Automotive Sector Partner
In addition, while Apple insists that even companies that have never worked in the field will produce cars, doubts remain. Surely, Apple wields enormous economic power. But even if it does launch a car, for it to be successful it has to be as much “car” as it is gadget. Apple has everything to teach the automotive sector about the “I” part of the name, but it has much to learn about the “car” aspect.
No matter how appealing, any car still requires plenty of specialized expertise to sell. There are the advanced hardware, the dynamic performance, and the active and passive safety features that require specialized automobile experience. Cars are far more demanding products than consumer electronics. As Tesla has learned in the past few days, electric power is no substitute for reliability.
Tesla and Apple, or any other financial giant, cannot skip steps and assimilate in a matter of a few months or years the structures and know-how needed for industrial mass production and quality. A half-baked approach would be disastrous for Apple stock. Success can only happen if a company simply acquires some car manufacturer in need of commercial and financial partners, which is both more probable and possible.
Apple’s autonomous car could be ready by 2019, or possibly by 2020, marking the future of the automotive world. Alphabet Inc. (NASDAQ:GOOG), which has already been conducting road tests, might be the first completely autonomous vehicle, even if Tesla offers driverless features already in its software upgrades for customers. The company from Cupertino has been mute about its car plans in order to protect Apple stock, which could suffer if the industry were to consider its approach ineffective.
Tim Cook, Apple’s CEO, has been hush on the development of the iCar. But he has been hinting about it profusely and Marchionne’s musings on the topic suggest the possibility of cooperation is likely despite the denials.
Meanwhile, in the wake of Ferrari’s successful initial public offering (IPO), analysts Kepler Cheuvreux raised from their price target for Fiat Chrysler stock from about $15.00 to $16.00 a share, based on the improvement in earnings per share estimate for the biennium 2015/2016. FCA stock will also benefit from the fact that the company has sealed the approval of the labor agreement with the United Auto Workers.
What Comes Next for Fiat-Chrysler Stock After the Ferrari IPO?
With the ratification of the agreement, the union must now decide whether to open a table for the renewal of the contract with General Motors Company and Ford Motor Company (NYSE:F) together, or go after them individually. Moreover, both of those companies will have to negotiate on FCA’s terms. The successful IPO and UAW negotiations will push Fiat-Chrysler to pursue its goals of acquiring another major player in the automotive industry of which General Motors remains the likeliest.
At that point, a Fiat Chrysler-GM union would be challenging Toyota and an already weakened Volkswagen Group for the top spot in the automobile industry. While Fiat Chrysler stock is cheap now, it will be much more difficult to get into it later.
If there is anything that the Volkswagen AG (OTC:VLKAY) emission scandal has demonstrated, it is that research and development costs will go up further, because the market demands vehicles that can deliver high dynamic performance and energy efficiency while addressing stricter environmental standards. Fiat-Chrysler stock will shoot up if it succeeds in taking over GM while also cooperating closely with Apple.
The present and rapid changes in the automotive industry have raised many questions about the very future of the automobile; Ferrari’s IPO is rather paradoxical in this sense. The company has helped sustain Fiat-Chrysler stock, acting as its jewel. It has always relied on technological innovation but its very essence clashes with the future that Fiat-Chrysler is being forced to pursue along with other mainstream manufacturers.
Ferrari has many faces. It is the most important Formula 1 team, a luxury brand, and a merchandising leader while predominantly being a manufacturer of sports cars. Ferrari makes unique cars, objects that extend beyond the idea of the automobile in its practical sense. They are designed to trigger emotions. Even when parked.
Ferrari has competitors such as Porsche, part of Volkswagen, but even the latter has a different industrial and market strategy. Porsche targets production volumes of about 200,000 cars a year. Ferrari recently opened to the possibility of making more than 7,000 cars a year. Porsche also offers sedans, SUVs, and hybrids.
With its IPO, Ferrari will have to tackle new challenges because of the market and because the very notion or paradigms of the automobile, even the ones belonging to the exclusive category of supercars, are changing. Unlike any other carmaker, Ferrari has cultural baggage that hinders its development of two of the fastest-growing market segments: electric power and SUVs.
The very thought of an electric Ferrari, one missing its mechanical jewelry, and devoid of the music of its 12 or 8-cylinders, is impossible to fathom for the company’s fans. They cringe at the thought. A Ferrari cannot produce the hiss of a Tesla; it must roar. Ferrari fans also cringe at the sight of a Ferrari SUV.
Porsche, meanwhile, has already unveiled an electric sedan at the Frankfurt Motor show just as Aston Martin has also introduced its Rapide EV prototype. A Ferrari running on Li-ion batteries is an absurd idea even if the company has experience with hybrids both in its top of the line hypercar LaFerrari and in Formula one racing. This level of specialization only fuels speculation about collaboration between Fiat and Apple. Such a union would allow Fiat to have a major stake in the electric and driverless vehicle market without having to compromise the purity of the Ferrari brand.