Talk of Apple building a car is not new. In fact, they’ve been orbiting the possibility for the last seven years. During that time, the response from investors could best be described as a collective rolling of the eyes. Until now. A Bloomberg report reignited the Apple Car conversation, pushing shares of AAPL up over 4%, adding about $100B to the company’s valuation. As a point of comparison, Rivian’s current market cap is $109B. In the midst of continued rumors around the project, this report stands out for two reasons: First, it’s the first time we have details about the current direction of an Apple Car, which will lead with autonomy – as in Apple building a car without a steering wheel. Second, the report comes from Mark Gurman, who’s right 90% of the time. Gurman is not saying Apple will release a car. He is saying the company wants to do just that.
Lessons from the past
I’ve studied Apple for almost 20 years. Perhaps my low-light was when I was famously wrong in predicting the company’s internal project to build a television would yield a product. With that lesson in mind, I cautiously explore five thoughts on what an Apple Car would mean for Apple. If you’re wondering, I believe there’s a greater than 50% chance Apple eventually comes out with a car, and it’s likely more than five years away. While the eventuality of an Apple Car is far from certain, the continued talk about Apple’s ambitions in the space is almost certain in the years to come, which should lead to multiple expansion for shares.
What it means for Apple:
- A car is in Apple’s wheelhouse. Cars will become a computer on wheels – a collection of hardware, software, and services. The nexus of these three elements is what Apple excels at. I think of cars as big tech devices that will have services sold around the hardware. The software will hold it together. This model has supported a 25-30% operating margin, in line with Apple’s current margin structure.
- Just like other Apple devices, Apple would design the car and a third party would build it.
- The revenue impact to the business would be material given the total addressable market for auto is massive. For example, if you assume Apple can capture 10% of the auto market, (they have just under 20% of the phone market today), by selling a $60k car, it equates to $540B in annual revenue. That compares to Apple’s FY22 expected total revenue of $380B.
- In other words, Apple Car revenue could, over the long term, be greater than all of its other businesses combined.
- I caution it’s too early to price in the potential given we don’t know if the car will see the light of day, and even if it does, it’s five-plus years away. That said, the impact on Apple’s valuation could be staggering. Shares of Apple currently trade at 6.8x next year’s revenue forecast. If Apple captures 10% of the global auto market, and investors value auto revenue similar to how they value Apple’s current revenue, the car would add $3T to Apple’s current $2.6T market cap. On the other hand, if Apple captures 1% of the car market, it would add about $300B to the company’s valuation. Using this framework implies the market is now expecting Apple to eventually capture about 0.3% of the global car market.
Auto does not stand alone
Apple’s innovation ambitions go beyond the car. Auto stands next to AR + metaverse as Apple’s two biggest opportunities. The health care opportunity is measurable and yet a distant third.
Zillow’s recent exit from iBuying sent a shockwave through my confidence that iBuying has a long-term profitable place in real estate tech. As I thought it through, I concluded it’s too early to tell if the iBuying opportunity will stand the test of time. In the meantime, it’s still our job at Loup to predict where consumer behavior will evolve over the next decade and which companies will enable that change. Opendoor’s September quarter report, in the shadow of Zillow’s iBuying exit, was at least one data point that iBuying has a future. And if it does have a future, Opendoor will be a likely winner given Zillow’s exit puts about 25% of the iBuying market share up from grabs, and Opendoor is positioned to capture much of it given it’s the only iBuying company with scale based on its current 50% plus market share. Loup is an investor in OPEN.
Takeaways from the quarter
- The company is operating above plan, as evidenced by exceeding revenue expectations by 13% and guiding revenue up by 8% for the December quarter. EPS was a loss of $0.09 compared to the Street expecting a loss of $0.17.
- From a high level, Opendoor’s vision is to build a consumer-facing, vertically integrated way to sell, finance, and buy homes. This is where Zillow struggled to innovate, given the marketplace nature of the platform put Zillow’s cash-generating customers (agents) at odds with vertically integrated products.
- Zillow leaving the market could impact Opendoor’s marketing efficiency given Opendoor will likely benefit from Zillow building broader awareness of iBuying. That said, with an NPS consistently above 80, once Opendoor gets a foothold in a market, word-of-mouth marketing is powerful.
Why has Opendoor not blown up like Zillow?
Understandably, the earnings call focused on the risk that Opendoor’s iBuying aspirations ultimately end like Zillow’s. The company pointed to its pricing algorithms, which include risk management rules, along with operational refinement and scale, as reasons why they’ll be successful in iBuying. From my end, while the jury is out, things are moving in the right direction.
- Pricing Models. The company said its pricing models are “core to what we do” and something it treats as “proprietary and a large competitive moat that compounds as we get to scale over time.” Additionally, CFO Carrie Wheeler reiterated that “the model works in up markets and down markets.” In other words, Opendoor is saying it scales up or down its pricing spread based on their projections for each market. While the company’s response to the questions is predictable, they have backed that up with a reporting metric. If they meet their guidance for December, it will mark the 20th consecutive quarter in which Opendoor has posted a positive contribution margin. In other words, 20 quarters in which they’ve made money on buying and selling the home. Although the company is still losing money after factoring in operating expenses, the contribution margin trend is encouraging for the iBuying theme. In terms of risk management, CFO Carrie Wheeler commented it “is part of our DNA. We spend as much time on the risk management side as we do thinking about the acquisition [pricing] side.” Ultimately, the fact that Opendoor is purpose-built for iBuying and has refined its process over the past seven years means they’re the best in the business at pricing and managing risk.
- Operations. The company gave color around its operational approach. Specifically, they called out two things they focus on in their operations platform: centralization, in that all customer questions and home offers run through headquarters. This provides efficiencies, visibility, and more control over each market. Second is virtualization, by which they leverage seller-generated video walkthroughs to help evaluate homes. The video walkthroughs before purchasing a home are efficient, but riskier in my opinion.
Loup is not invested in Rivian because the valuation makes us uncomfortable. That’s neither here nor there, because the fact is shares of RIVN keep going higher. I believe the spike is a combination of scarcity value meets theme investing.
Market Cap Comparisons
As a starting point, the top five EV automakers have a combined value of about $1.25T. This includes Tesla at $1T, Rivian at $125B, Lucid at $70B, Xpeng at $41B, and Li Auto at $31B. In comparison, the top five traditional automakers have a combined value of about $600B. Deliveries for the top five EV companies will account for about 3% of global auto sales in 2021. The wide valuation gap between EV-only makers and traditional OEMs is of course related to growth expectations over the next decade. In short, investors have voted on who they believe will be the long-term winners in auto.
Why is RIVN spiking?
Rivan went public at a $60B valuation and within two days, the value of the company more than doubled to $125B. While Rivian’s valuation is eye-opening, the path to it is understandable. I believe the spike is due to a combination of two things. First, Rivian’s partners, which include Amazon and Ford, check a quality box for institutional investors that most public EV companies can’t check. Second is the rise of theme investing, of which EVs are especially intoxicating to investors given the rise of TSLA, and to a lesser extent, LCID. Putting it together, it’s the fear of missing out that has further fueled the rise in RIVN shares.
Uncomfortable with Valuation
My framework around Rivian’s valuation starts with the underlying question, how many cars will Rivian sell in five years? That is more difficult to answer because there’s less visibility into the models Rivian will be selling over that time period. By comparison, Tesla has given investors a more clear five-year vehicle roadmap with the addition of Cybertruck, along with the likely Model 2 during that time (Tesla Semi won’t move the needle).
Back to the Rivian delivery question. Since the five-year model lineup picture is difficult to predict, I anchor in a two-year view, based on the current lineup of three Rivian models: the R1T (pickup), R1S (SUV), and Fleet (Amazon Prime delivery truck). The list price of the R1T and R1S is $70k, which means the average selling price will be around $80k. This is below Tesla’s S&X average selling price of around $95k. Tesla will sell about 70k vehicles per year of these high-end models. In other words, if you price an EV for $95k, you’re likely going to sell around 70k units a year.
Since Rivian’s two consumer models are less expensive than Model S&X, demand should be higher. I’m expecting around 100k deliveries for full-year 2023. Add on top of that fleet deliveries of 50k in 2023, and I get to 150k total deliveries. Tesla is expected to sell nearly 2m cars in 2023. In other words, excluding cash, investors are valuing RIVN at about $750k per 2023 delivery, compared to Tesla valued at $500k per 2023 delivery. An adjustment to the Tesla metric must be made to factor in the value of energy and storage, FSD, and insurances business, which I put at $150B.
Adjusting the Rivian vs. Tesla exercise to an apples-to-apples comparison suggests investors are paying about $750k per 2023 Rivian delivery and $425k for a Tesla delivery. In other words, using this approach, shares of RIVN are valued about 50% higher than shares of TSLA.
Patience is a virtue
Cash is king, and the fact Rivian has raised $12B in cash eliminates the viability question that plagued shares of Tesla for three years during its product line expansion investment ramp. Rivian says the cash on hand also accelerates how quickly it can grow. That’s true, however, moving fast in auto is slow by tech standards. It will take a couple of years for the Rivian production ramp to be validated, which should be a reminder to RIVN investors that patience is a virtue.