The media may love the prospect of Apple (AAPL) selling an iCar, but investors should be scared as all hell.
But let me first explain why the media love what looks to be an inevitable launch of an iCar. First, it would represent an entirely new product category to discuss throughout the year. Face it: Apple only unveils major products once a year, and in between it's filled with speculation as to the company's future intentions. By hawking cars, Apple promises to be even more in the limelight both at auto shows around the world and on the streets with test drives and the like. Imagine the photos poised to float around Twitter and Facebook of iCars being reviewed by some hipster geek that doesn't even own a car because he/she lives in the urban jungle? (Apple is part of TheStreet's Action Alerts PLUS portfolio.)
Another reason for the media euphoria is that an iCar would set off speculation Apple will move into flying objects by 2030. Yes, flying objects such as flying cars and high-powered delivery drones that make what's on the market today from Amazon (AMZN) and GoPro (GPRO) seem like a damn joke. Believe it or not, flying cars are much closer to becoming a reality than you think. (Amazon is part of TheStreet's Growth Seeker portfolio.)
But from an investment standpoint, Apple getting into the car business is a material risk. Read that again -- a material risk that deserves its own section in the company's annual report. Not a line, not lumped in with other risk factors related to tech development, but 400 words on why selling cars is a major problem to future earnings and cash flow for a company that, as of today, has no problems with either financial line item. In no way do I believe the market has even begun to consider the risk to Apple's pristine financials from car production. It may be some time before that happens, granted, but it deserves to be considered if you own Apple shares today with an eye toward holding for the next 25 years.
Here are three risks I see to Apple entering the car business:
1. State dealer regulations: It isn't easy to break through state dealer regulations; just ask Tesla (TSLA). Litigation such as Tesla's has confronted chips into cash, brand reputation and ultimately leads to a greater investment in people and equipment to overcome regulators.
2. Competition: if this was 10 years ago and Apple was getting into the car business, I would say the company could pose a serious risk to the established names such as Ford (F), Toyota (TM) and General Motors (GM). But if you look across the auto landscape, government regulations and the advance in technology have leveled the playing field on fuel economy and creature comforts for drivers. Unless Apple creates some kind of 700-horsepower electric car that goes from 0 to 60 in one second, and can cook your dinner with the push of a button, it may be tougher for the company to break into the car business than investors expect. Car manufacturers have simply gotten stronger -- we are very much in the midst of significant industry innovation. The tough competition may cause Apple to spend more in cracking into the auto business. (Ford is part of TheStreet's Dividend Stock Advisor portfolio.)
3. Capital allocation: Think about this -- as of today, Apple has zero capital equipment related to car production. No giant buildings to house manufacturing. No charging stations. No dealership infrastructure (we are unlikely to buy an iCar from the App store due to government regulations). What this may cause is Apple to pull money from shareholder-friendly actions such as buybacks and tech gadget investments and empty it into the black hole known as auto manufacturing. You see Tesla's financial state? Exactly.
The only way I personally could warm up to Apple selling cars is if it bought Tesla. The electric-car maker has invested in a ton of physical infrastructure already, and has a founder in Elon Musk who could conceivably take over Apple someday. Apple purchasing Tesla and broadening its reach would be a more efficient use of capital, in my view.
Until then, however, be careful what you wish for, Apple iCar fans.