How One Little-Known Company Is About To Help Apple Take Down Tesla

How One Little-Known Company Is About To Help Apple Take Down Tesla
Reda Farran, CFA

about 3 years ago2 mins

Mentioned in story

What’s going on here?

In case you haven’t heard, tech giant Apple is seriously considering getting into the electric vehicle (EV) business. But it’s highly unlikely to do so alone. As it focuses on making the software and battery breakthroughs essential for self-driving success, Apple is expected to hand over the complicated and capital-intensive “iCar” engineering work to a contract manufacturer. Enter Canada’s Magna International

What does this mean?

Apple already does something similar with the iPhone: it designs the handset and the operating system, but employs Foxconn – the world’s biggest electronics contract manufacturer – to actually make the things. When it comes to cars – and the risk of experiencing the sort of production setbacks that once plagued Tesla – the case for a new entrant outsourcing engineering to an experienced party is even clearer. The multi-billion-dollar question, of course, is who.

The analysts at investment bank Evercore are among several who think Magna – a major mobility technology company – is the obvious choice. Its specialist contract-manufacturing subsidiary, Magna Steyr, already builds niche premium vehicles for auto firms such as Daimler, BMW, and Jaguar Land Rover.

And Magna’s client roster doesn’t only consist of traditional carmakers. It also advises tech groups and start-ups, including Alphabet’s Waymo, that are looking to enter the automotive business on an asset-light basis.

As Magna Steyr’s boss told investors last year: “It’s not a secret that almost every non-OEM interested in realizing its own complete vehicles is contacting us”. Apple, indeed, brought in a team of Magna engineers back in 2016 to work on a previous iteration of its now-revived EV plan.

Why should I care?

Unsurprisingly, investors have taken note of Magna: the company’s share price has tripled since March, giving it a market value of over $22 billion. Nevertheless, Magna’s stock continues to trade below the value of its sales per share – compared to Tesla’s price of 25 times revenue and Apple’s seven. And unlike many other EV-exposed firms, Magna’s profitable, generating positive free cash flow which it regularly returns to shareholders via dividends and stock buybacks.

As always, however, you should do your own in-depth research before investing in Magna – which also comes with risks. Apple may once again decide to ditch its EV plans. And even if it goes ahead, there’s no guarantee Magna will get the business. Late last week, Korean automaker Hyundai’s stock surged on news of early potential partnership talks with Apple (although whether sharing plans with a would-be rival works out remains to be seen).

Last but not least, even if Magna is selected, Apple would probably drive the same sort of hard bargain it does with Foxconn. After all, contract manufacturing’s economics – and therefore its profits – aren’t that lucrative. Time will tell whether the current investor interest in Magna is justified. But at least you’re now plugged in to what might just be the next big thing…

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