Tuesday, February 24, 2015

Apple's Longterm Growth Horizon is Clean Tech

Well, it's finally happened: Someone at Apple seems to have read my blog and is forming the basis of the company's growth strategy based on my advice. I should charge for this!

Ok, but seriously: Back in October 2013 I penned a post detailing five reasons why Apple's next i-thingy should be in the clean tech space. At that point, AAPL has slumped about 25% off its $100 peak (adjusted) the previous fall and speculation was rising that with Steve Job's passing, the company may have lost its ability to innovate truly innovative products. The question everyone was asking was: What's next?

Now that Apple had taken over and re-defined the music biz, the high-end cell phone biz, personal computing and the tablet, what else was there that they could make? What else could people possibly want? Apple's share price then had tumbled because of a loss of faith in innovation. While fantastic sales of the iPhone 6 have since led the company back to all-time highs, the question about where the next 10 years of growth would come from still loomed in some analysts minds.

My logical solution was clean tech. Apple is great at designing and producing electronics people wanted to use. Why not solar panels? Why not electric cars? I argued that Apple is great at disrupting, and the energy industry is ripe for disruption. Apple had the financial capital (then $140 billion in the bank -- more than 10 times the US energy R&D budget). It has the human capital (the best design and branding talent in the world). It also had a need to come up with a new industry to dominate to ensure continued ridiculous returns to its shareholders, and the energy industry is, to any objective observer, ripe for disruption with clean technology solutions.

Well, today Apple is sitting on even more cash than it was in 2013 (a whopping $178 billion, without a clear way to spend it), and they finally are taking my advice. In the past few weeks, two big pieces of Apple news have come out around clean tech:

  1. A decision to become a leading consumer of electricity with a monster $850 million power purchase agreement from First Solar, which would be the biggest power purchase agreement in history for any non-utility entity.
  2. Substantiated rumors swirling of a possible Apple plan to produce an iCar

While we don't have hard numbers or any completely conclusive information about the iCar, I think its safe to say that these rumors at minimum give Apple innovation/growth bears something to chew on, and at best open a new and huge avenue for Apple's future growth and a clear path to the magic market cap of $1 trillion in the not-too-distant future. While crossing industry lines from a high-margin (tech) to low-margin (auto mobiles) industry is no easy  task, there's arguably no company in history better positioned to execute such a transition successfully.

With Tesla Motors demonstrating that a market exists and incurring a lot of the initial exploration, research, and development, costs, Apple will likely find the growing niche electric car market market in 2020 ripe for capture.

Such a move actually fits in with Apple's core competency, which has never been fundamental innovation, but rather excellent leapfrog innovation-- essentially waiting until a small niche market had already formed with several fragmented competitors, and then blowing it wide open with superior design, branding, and the loyalty of its affluent repeat customer base. I see the electric car market in 2020 fitting this pattern nicely: sales of electric (and perhaps even self-driving cars) will continue to grow, albeit moderately over the next few years. Problems and inconveniences such as charter compatibility standards and personal device integration will continue to abound for the early adopters who are at the fore front of this market.

Enter Apple with a perfectly honed driving machine with perfect design and connected to Apple's existing technology and data management ecosystem, and suddenly electric cars will move from early-adoption phase to mainstream adoption phase. This is what happened with the original Macintosh computer, the iPod, the iPhone, and the iPad, and I see no reason to doubt that with $178 billion in cash to burn that Apple to can make it happen again with the iCar. Elon Musk was able to to launch a game-changing, aesthetically pleasing, digitally integrated high-end car in a few years with Tesla, it and he didn't have $178 billion in cash to spend. While Musk's genius level is clearly not something that Apple can buy, his employee's engineering talent is certainly up for grabs and Apple has no qualms about throwing money at senior engineers and former CEOs to ensure it dominates the world's best technical and market talent in the target industry space.

As for the solar deal, while its only a power purchase agreement and not a move from Apple into designing home solar devices, it still demonstrates Apple's understanding of its customer base's values. It also probably saves Apple money in the long run when considering California's generous tax incentives on top of federal tax credits for solar and the large and long-term nature of the agreement. It costs Apple nothing up front while giving the US solar industry a billion-dollar boost.

And sunny news for solar: Apple's not the only company making these moves. Shell, Citi, General Motors, Amazon, and Kaiser Permanente are just a handful of the other multi-hundred-billion-dollar market cap companies that have made serious clean tech commitments not just for CSR reasons but for economic ones.

Good moves all around.

If you haven't read my original article about why a move by Apple into clean tech makes sense, check it out.

Disclosure: I wrote this purely for educational value and to express my views. I am long AAPL and FSLR.