Apple Inc.'s Project "Titan" Could Be a Win and Loss for Shareholders

By Markets Fool.com

If you're a technology enthusiast, you likely didn't hear it here firstthat tech giant Apple is secretly developing its own automobile.

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The tech and automotive communities have been absolutely abuzz about Apple's recently discovered pet project, and for good reason. Imagining Apple applying its unique ability to fuse disruptive technology with attractive design is enough to excite investors and enthusiasts alike.

So, what do we know about Apple's "Project Titan," and what implications could it have on Apple and the broader technology and automotive industries? Let's take a look.

Apple's Project "Titan" -- what we know now
According to reports from The Wall Street Journal, Apple currently has several hundred employees working in an undisclosed location near, but separate from, Apple's Cupertino, California, headquarters on its automotive development project, which is code named Titan.

Like many technology companies, Apple investigates potential new market opportunities all the time, and many never make it to market. Just skimming the litany of patents Apple files annually, you quickly get the sense that far from all of its inventive output makes it into the products that increasingly power our everyday lives. However, as the WSJ notes, Apple has staffed the Titan project with senior leaders to indicate that it has moved beyond the exploration phase.

Project Titan is apparently being led by veteran design VP Steve Zadesky who played an important role in the development of the iPad and iPhone. Titan's also been a powerful attractor of both internal and external talent. The WSJ report notes that Apple's automotive initiative has helped Apple hold onto top talent that might have otherwise pursued more exciting opportunities elsewhere, while also giving Apple a strong tool with which to poach key talent from the automotive and electronics industries.

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According to these same reports, Apple's development efforts are largely focused on producing an electric automobile that roughly resembles a minivan, but aren't necessarily focused on driverless technology currently under highly publicized development at rival Google. However, having launched its CarPlay in-car software early last year, it certainly makes sense that Apple would take an interest in also producing compatible hardware given its infamous "walled garden" philosophy to hardware-software integration. Given the size and depth of the talent apparently driving (pun intended) this project, it appears Titan's development is more than your average research program.

What Titan could mean for Apple stock
For starters, Apple investors should not hold their breath in anticipation of an Apple auto in the near future. Recent reports claim Apple hopes to have project Titan in the marketplace by 2020, several years behind similar projects from Google, General Motors, and others. However, in terms of assuaging investors' nagging expansion concerns, entering the automobile market presents a salivating growth opportunity for Apple investors.

According to a research note from Piper Jaffray's noted Apple bull Gene Munster, the U.S. auto market alone represents $500 billion in annual sales. And while Apple probably wouldn't be able to gain the roughly 40% market share in enjoys in the U.S. smartphone market, it doesn't take an overly active imagination to envision the kind of massive revenue opportunity moving into the global auto industry could provide for Apple.

However, entering the auto market could also pose a potential problem for Apple because of the less-than-ideal economics of the automotive industry. The dominant factor in Apple's amazing success to-date stems from the positively gaudy profitability of its suite of iDevices, the iPhone in particular. At least from what I can tell, few people have focused on the potential profit margin implications that a move into the auto industry could have on Apple's relative profitability, but they should.

GM

Ford

Apple

Average Profit Margin (FY '12-FY '14)

3.4%

3.8%

23.3%

Source: GM, Ford, and Apple SEC Filings

Obviously, there's money to be made in the automobile market. The point I'm trying to highlight though is that entering, and hopefully gaining a material presence in, the global automobile market could be like kryptonite to Apple's margins. Even the "best in breed" car makers likeToyota orBMW typically don't see margins reach far north of 7%.

Apple is famous -- or infamous, depending on your perspective -- for its ability to maximize profits by dominating its supply chain. Apple outsources lower-margin portions of its supply chain like manufacturing to third party vendors and is notorious for demanding what some might describe as draconian terms from its component supplier partners (R.I.P. GT Advanced), so one can certainly hope the economics of the Apple Car might skew toward the higher-end of the industry's margins. Nevertheless, there's little doubt that entering the automobile market would have a downward drag on Apple's long-term profit margins.

Another significant risk in seeing a storyline like this appear is that it creates undue optimism. In fact, Apple's timing in this leak might be more calculated than many think. However, anytime such a tantalizing growth story comes along, especially one with such an extended time horizon, it usually requires a compulsory bucket of ice water to the face.

Hurry up and wait
If these reports are to be believed, then project Titan still sits a cool half-decade away from actually contributing to Apple's financial performance, a practical eternity in the what-have-you-done-for-me-lately investing world we live in today.

And while we here at the Fool love buying and holding winning companies over the long term, pinning your hopes for Apple's growth on such a long-dated project that may never see the light of day also seems fraught with risk.

The article Apple Inc.'s Project "Titan" Could Be a Win and Loss for Shareholders originally appeared on Fool.com.

Andrew Tonneradmittedly isn't a car guy, but he's not sure he loves the idea of an Apple "minivan" either. Andrew does own shares of Apple and Ford though.The Motley Fool recommends Apple, Ford, General Motors, and Google (C shares). The Motley Fool owns shares of Apple, Ford, and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.