Analysts and media taken for a ride by Apple car

What can the Apple car circus teach us about investing? Quite a lot as it happens, argues Apple shareholder John Addis.

When I moved up to northern NSW about 10 years ago, like many city refugees I succumbed to the ride-on mower effect. It’s hot and humid up here and stuff grows fast. Nature is constantly trying to recolonise your living spaces and if you don’t mow at least once a week small children are easily lost. Personally, I enjoyed the break a lost child offered but had trouble later justifying it to the mother.

Eventually, there was no avoiding it. Either I purchased a ride-on mower or I paid someone to ride one for me. Although I chose the later option, most people went for another expensive vehicle that spends most of its time in a garage.

The car industry suffers from the same effect. Almost everyone owns a car but we spend only a small fraction of our lives inside them, often swearing at passing traffic and cursing our inept governments at their failure to invest in [insert pet hate here].

Cars depreciate in value quickly, cost a lot to run and require huge government expenditures to give them somewhere to go. If ever there was an industry ripe for disruption, this is it. There are 17.6 million vehicles in Australia. Can you imagine the effect on personal and government finances, to say nothing of air quality, if you could take half of them off the road?

Car sharing companies like GoGet have had a crack and now it’s Apple’s (NASDAQGS:AAPL) turn, or so we’re led to believe.

This ‘story’ – the air quotes are necessary because Apple hasn’t publicly confirmed the rumours – has sent the media and market analysts into a frenzy, allowing both sectors to get even more excited about a company that really excites them already. Which obviously has nothing to do with the doubling in share price in the past 12 months or so. No, can’t be that.

Apple car could drive company to $1 trillion valuation, says Morgan Stanley (NYSE:MS). Apple’s Project Titan ‘could change the way we drive’, says News.com.au while Business Insider thinks ‘Apple could not have picked a better time to get into the car business’. Even the sober, Kool-Aid free Wall Street Journal got in on the act, claiming Apple is ‘gearing up to challenge Tesla (NASDAQGS:TSLA) in electric cars’.

Such speculation is faintly ludicrous. And using something that doesn’t yet exist (and may never) to justify a higher 12-month share price target, as Morgan Stanley did, is just plain weird. But then again, 12-month share prices are just plain weird.

There are some good reasons why Apple could try and build a car. It has brand cachet, a supply chain that is second to none, proven retail experience and well-designed products. It even has cash to burn on what for anyone else would be an impossible punt.

But it doesn’t have car lots, or mechanics, or electric charging stations. Nor has it built anything as big as a car, which can kill people when things go wrong rather than just trigger an incidental reboot.

But most of all, why would Apple want to get into an industry that makes single digit returns in a good year when it is making 30-40% on mere gadgetry? Can Apple really disrupt the auto industry to such an extent that it can quadruple the long term returns the industry currently makes to justify such a decision? I doubt it.

The speculation has got a huge run because Apple has employed a few people from Tesla and Mercedes. Fortune calls this ‘the best evidence yet that Apple is working on an electric car’, which is a bit like saying a small screw on your lounge room floor means your house is made of Meccano.

Apple also employs people from Google (NASDAQGS:GOOG), so it must be building a search engine, or maybe Internet balloons. Angela Ahrendts runs Apple’s retail and online stores. As a former CEO of Burberry (LSE:BRBY), she must have plans to let customers buy yuppie tie pins and knitwear with their next iPhone. With 47,000 employees in the US alone, surely at least one once worked at Dunkin’ Donuts?

Okay, you can see where this is going. Let’s move on. Apple already has an automotive product, a version of its mobile operating system called CarPlay, which Apple calls ‘the best iPhone experience on four wheels.’ My guess is Project Titan somehow relates to this.

But if not, an Apple car does not necessarily follow. The company has money to burn. Employing 19 people just to create the kind of media buzz Apple has enjoyed over the past few weeks is easily justified, as is employing a team to investigate the remote possibility of making a car. Either way, Apple wins by making Wall Street analysts look foolish as they slavishly drool over unsubstantiated rumours, updating their ‘models’ to account for something that probably isn’t true.

And the lesson in all of this?

Remember that frisson of excitement when your favourite news site published the first of 30 stories on the Apple Car, and then followed up with quotes from analysts on how this will be a game changer for one of the world’s biggest industries, and for Apple?

That’s how we get sucked in. That’s how we buy stocks that aren’t good for our portfolio, when the chatter and excitement around a company prompt the fear of missing out and we hit the buy button without thinking.

The time to buy Apple was over a year ago, when those same analysts now pumping the stock up were talking it down to the point where one of the world’s most powerful, lucrative brands was trading on a PER of less than 10 and the media had all but written the company off.

It’s too late to buy Apple now, but there’s plenty of value in the lessons to take from the unedifying circus of the past few weeks.

You won’t find positive stories about many of the stocks on our buy list. Apple’s recent history explains why. By definition, stocks can’t be cheap and popular. But cheap and unpopular? That’s more like it.

Disclosure: John Addis owns Apple stock. He would prefer the company turn its hand to ride-on lawn mowers than cars. iMower has a certain ring about it, don’t you think?

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