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5 Reasons Why Apple Buying Tesla Makes Sense (AAPL, TSLA)


At about this time last year a lot of pundits were talking about Apple buying Tesla.

This week the idea got some new life when several camera-laden minivans owned by Apple Inc. (Nasdaq: AAPL ) was spotted in the Bay Area.

The vehicles suggest Apple is either copying Google Inc.'s (Nasdaq: GOOG , GOOGL ) StreetView feature or developing its own self-driving car technology.

Apple has toyed with the notion of jumping into the auto industry for years. During one of the patent fight trials with Samsung, Apple marketing chief Phil Schiller said the company had discussed building a car even before it made the first iPhone.


Ideas often gestate for years at the Cupertino, Calif., tech titan. With Apple no doubt looking for new worlds to conquer, the auto industry could well be at or near the top of its list.

And Apple buying Tesla Motors, Inc. (Nasdaq: TSLA ) would make entry into the auto business much easier.

Besides, AAPL needs to plan ahead for the day when the iPhone will no longer be the company's primary growth engine. It can do that in two ways. One is to develop new products in new categories in-house, the way it has always done.

The other way is to make an acquisition to give it a beachhead in a major new business. And Apple buying Tesla fits the bill.

"Apple must increasingly rely on new products to reignite growth beyond the vision" of late founder Steve Jobs, Bill Kreher, an analyst with Edward Jones Investments in St. Louis told the San Francisco Gate last year. "They need the next big thing."

Consider this. After its Q1 earnings, the cash pile at Apple is an astonishing $178 billion.

That's more than the market caps of Amazon.com (Nasdaq: AMZN ) ($173.6 billion), The Walt Disney Co. (NYSE: DIS ) ($174.5 billion), and McDonald's Corp. (NYSE: MCD ) ($91.8 billion).

Yet Apple has made just one large acquisition in its history, its $3 billion deal for Beats Electronics last year.

Apple could spend much more if it wants to, and TSLA is affordable.

The Palo Alto, Calif.-based maker of electric cars has a valuation of $27.5 billion right now. So with a premium of between 20% and 30%, Apple buying Tesla would cost from $33 billion to $36 billion. That's only about 20% of Apple's cash.

Of course the real question isn't whether Apple buying Tesla is doable, but whether the marriage would work.

5 Reasons Why Apple Buying Tesla Is a Good Idea

Here are five reasons why Apple buying Tesla makes a lot of sense.

Apple Buying Tesla Reason No. 1: The auto industry is really a tech industry.

One of the issues analysts have with TSLA is figuring out whether to treat it as an auto company or a tech company. In fact, the auto industry and tech are merging. Tesla is just one example. Google has been working on a self-driving car for years. Now Uber is working on the technology. And the cars we drive now are chock-full of tech - both hardware and software. Tesla, in particular stands out because it only makes electric cars. Basically, electric cars are mobile, battery-powered devices. Sound familiar? That also describes an iPhone or iPad.

Apple Buying Tesla Reason No. 2: The companies have compatible cultures.

Many consider Tesla CEO Elon Musk the spiritual heir to late Apple CEO Steve Jobs. Both men created companies infused with a vision of developing great technology to build user-friendly, premium products. Both companies have built a cult-like following among customers. Plus, it would not be necessary for Apple to tinker much with Tesla, as there would be little overlap between the two workforces.

Apple Buying Tesla Reason No. 3: Tesla could use Apple's resources.

At the Detroit Auto Show last month, Musk admitted that Tesla won't turn profitable under generally accepted accounting principles until 2020. Tesla also faces challenges in getting more charging stations available throughout the country. Concern over whether you can recharge your vehicle is a major factor holding back sales of electric vehicles. Apple's vast resources and influence could help solve these problems. Look at how quickly banks have adopted Apple Pay. Plus, the two could combine their efforts on battery technology. Any breakthrough in the ability to charge batteries quickly, and/or extend the life of that charge, would be a huge edge both for electric cars and mobile devices. Musk told Bloomberg last year that he would only entertain the idea of selling Tesla if such a deal would improve the company's ability to produce a mass-market electric car. Combining with Apple would do that.

Apple Buying Tesla Reason No. 4: Apple could use Musk's vision.

In addition to bringing an additive business, Apple buying Tesla could also land Musk on Apple's board. While Apple CEO Tim Cook has done a terrific job, he will be the first to admit he's not the visionary Steve Jobs was. Yet Apple is the kind of company that needs a visionary. Someone who can "skate to where the puck is going to be, not where it has been," a quote by hockey great Wayne Gretzky that Jobs loved to cite. As the head of companies like SpaceX and SolarCity Corp. (Nasdaq: SCTY ), the 43-year-old Musk could help keep Apple at the forefront of tech. Musk would be the insurance Apple needs to avoid becoming the next International Business Machines Corp. (NYSE: IBM ), AOL Inc. (NYSE: AOL ), or BlackBerry Ltd. (Nasdaq: BBRY ).

Apple Buying Tesla Reason No. 5: The integration has already begun.

Apple's CarPlay software integrates the iPhone with a vehicle's dashboard display. The company already has at least 35 auto-related patents. Most of these have to do with dashboard touchscreens and use of the iPhone to control functions like the heating and air conditioning. But as the mystery minivan shows, it's hard to say what Apple might be cooking up in its secret Cupertino labs. And third parties are also getting involved. One company, Eleks Labs, already has a Tesla-compatible app for the as-yet-unreleased Apple Watch ready to go.

The Bottom Line : Apple has a ton of cash and needs to do something now to prepare for the day when the iPhone can no longer carry the company. Apple buying Tesla would give it a way into the auto industry. The combination makes sense when you consider that the auto industry is evolving into a tech industry, and that both companies would benefit.

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Follow me on Twitter @DavidGZeiler .

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This article appears in: Investing , Investing Ideas
Referenced Symbols: AAPL , TSLA , GOOG , GOOGL , AMZN



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