(Veteran tech analyst Jon D. Markman publishes Strategic Advantage, a guide to investing in the digital transformation of business and society. Click here for a free trial.
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As a company Apple ( (AAPL) – Get Report) is renowned for focus and execution. The decision to make an electric vehicle is way out of character and that should be a giant red flag for investors.
News broke last week that Apple and Hyundai, a Korean carmaker, were in talks to collaborate on an EV to be built in the United States. Hours later Hyundai executives backtracked.
Apple is not normally associated with chaos. Then again, the Cupertino, Calif.-based company has never been a part of the automotive ecosystem.
Shareholders are likely to soon discover that was a blessing.
It’s important to keep in mind that Apple managers have been toying since 2014 with the idea of an autonomous EV. Project Titan was supposed to be Apple’s self-driving EV for the luxury car market, the iPhone of that segment. The concept was on brand and ambitious. It was also unrealistic given Apple managers had no experience with automotive supply chains or autonomous vehicle software. Two years into development Project Titan got a reset.
Apple project managers settled on building the software for an autonomous electric bus to shuttle employees between its farflung campuses. Managers even worked a deal with Volkswagen according to a May 2018 report from the New York Times.
Since 2018 the souped-up electric VW bus has been shelved, 200 engineers were laid off and the project was rebooted again with the hire of Doug Field, a former Tesla ( (TSLA) – Get Report) executive.
The revelation last week that Cupertino is in new a joint venture with Hyundai is just another weird twist in a story that has been all over the map for almost a decade.
There is still no reason to believe Apple will be able to make a competitive EV, let alone one that will self-navigate. Firms like Alphabet ( (GOOGL) – Get Report) and Tesla have significant leads with AVs.
Apple dominates consumer electronics with iconic products. Shareholders have benefitted from the tailwinds of Apple Watch and now Airpods, its lineup of high-end wireless headphones. An EV made by Hyundai sometime in 2024 is not going to be that. All signs point to more chaos and missed deadlines.
There is a better way for investors to play the Apple Car story.
Lumentum ( (LITE) – Get Report) is a key Apple partner. The San Jose, Calif.-based company makes the laser components used in Face ID and the sensors used for augmented reality found on the back of new iPhones and iPads. However the bigger story is a breakthrough the company recently made with the sensors used in LiDAR, the light-based radar common on AV setups.
LiDAR is a type of light detection and ranging radar. The sensor sends out a laser light to the target and the distance away is measured almost instantly by the reflection back to the sensor. LiDAR will build extremely accurate 3D maps in real-time.
Most companies working on AVs, the exception being Tesla, integrate LiDAR in the detailed maps at the heart of their autonomous software. The big problem has been LiDAR is expensive.
The new Lumentum chips send more powerful light arrays while being more energy efficient. They are also cheaper to produce. That’s a winning narrative for an investment story that is certain to get a lot of play moving forward.
This should lift Lumentum shares even as Apple shareholders get entangled in what is likely to be many quarters of negative EV headlines surrounding Cupertino’s car plans.
Currently Lumentum shares currently trade at 15x forward earnings and 4.7x sales. Earnings per share grew 425% in 2020 and are expected to grow a further 10.8% in 2021. Given the size of the potential AV market and the improved narrative, the stock could easily trade to $145 during the next 12 months, a gain of 34% from the current price of $108.10.
Consider buying any near term weakness in the shares.