Apple Working With Tesla Is A Fairy Tale
There’s been a lot of talk about Apple buying Tesla, but what if Apple simply made a $10 billion equity investment in the company instead? It sounds so good — Apple working with Tesla. In theory, it would make our lives so much better. Imagine all of the things you love about your iPhone, perfectly integrated with all the things Tesla owners rave about. The two tech giants could take over the auto industry over the next 20 years as consumers embrace electric vehicles and automation. Unfortunately, an investment from Apple, nonetheless an acquisition, would be hard to pull off. At the end of the day, that might be better for consumers if not investors.
Before we discuss why it won’t happen, let’s go over why it sounds so good.
For Tesla. A $10 billion cash infusion would all but eliminate any current or future cash problems for the company. While $10 billion equity investment would cause about 20% dilution today, it’s likely it would have a long-term benefit on Tesla stock given the removal of the cash question. Aside from the cash, we believe Apple could and would want to provide resources from their world class hardware, software, and AI teams to make Tesla’s the entertainment system and autopilot better. The investment would likely remove Apple as a potential direct or indirect competitor. Additionally, Tesla’s Model 3 could be showcased in Apple’s 490 retail stores in 20 countries.
For Apple. Investors would feel like they are actually doing something with their cash, which should be a positive for AAPL’s multiple. Apple would be investing in a company that has the potential to be multiple times bigger over the next decade. They would not be spending on the impossible, which would be building its own car to try to catch Tesla, but rather investing in making the leader even better. The impact of AI and robotics on the automotive sector is one of the next mega tech trends, and Apple would have a pole position within that theme.
Now, why the pairing won’t work.
- Single product visionaries. It’s hard to imagine Apple doing a deal without some deeper operational partnership or influence on the product given their work in the auto sector. An investment in Tesla, an American automaker, has very different strategic implications than the investment in Didi Chuxing, a ride-sharing platform in China. Apple has a board seat at Didi. Similarly, it’s hard to imagine Tesla management welcoming outside influence on their products when they already make the best car in the world. Musk won’t let it happen, and more importantly shouldn’t let it happen. Single product visionaries create world class consumer products. Steve Jobs with the iPhone and Mac and Musk with Tesla. These visionaries are able to construct their own unique cultures to build great products, but if you try to merge two great cultures, we believe you end up with mediocrity. If we as consumers want the best products, we should want Apple and Tesla to keep their cultures separate and do it their way, even if it means competing with each other in auto.
The deal Tesla might accept, Apple likely wouldn’t. Tesla might agree to a $10 billion cash investment from Apple if Apple were to accept non-voting shares and have no operational influence. Basically be a silent equity investor. The issue with operational influence relates to the last paragraph, but regarding voting rights, if Apple were to invest $10B and get voting shares, they would actually be the largest voting shareholder in the company, making Elon Musk second. As has been popular with large Internet companies, Tesla could create a non-voting share class that would enable Musk to retain his position as the largest voting shareholder in the event of an Apple investment; however, we don’t see Apple agreeing to non-voting shares because their philosophy on use of cash outside of repatriation has been to generate operational benefits. We believe would want some influence on Tesla.
- Why an outright sale won’t happen: Tesla doesn’t want it. So a $10 billion investment could make some sense, but the deal Tesla would accept, Apple wouldn’t and the deal Apple would accept, Tesla wouldn’t. Then why doesn’t Apple just try to buy Tesla outright? It’s important to understand how much Musk loves Tesla. On this week’s earnings call he said “I expect to remain with Tesla essentially forever.” We believe Musk as a very long-term vision for Tesla and money doesn’t motivate him. To that end, while Tesla doesn’t have dual class stock arrangements like some other companies, it does have supermajority voting provisions that protect the company from “unsolicited acquisition attempts and hostile takeover initiatives.” The supermajority provision means an acquirer would need two thirds of shareholders to vote for change of control. Since Musk owns 21% of the company, it would require 83% of the non-Musk shares to vote for the sale, which would be unlikely given shareholder support for Musk and other insiders loyal to Musk. It’s fun to talk about Apple buying Tesla, but we don’t think Tesla is for sale.
Apple has a long road ahead in auto.
One of the appealing parts of Apple investing in Tesla would be Apple getting to partner with a world class auto manufacturer. As Musk said on this week’s earnings call, the “factory will be a more important product than the car itself” and the “goal is to be the best manufacturer on earth”. Tesla has a giant lead in terms of manufacturing on the entire automotive industry. The company is investing in robotics and AI to increase their speed of production. Musk added on the call, “I refocused most of Tesla engineering, including design engineering into designing the factory.” The auto industry and auto hopefuls (WayMo, Apple, Baidu, Uber) will have a hard time catching up. So where does that leave Apple? Likely looking for a different auto partner or scrapping the program altogether.
Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.