Why does Aptiv Stock keep Declining?
Samir EL HAIDOURI
Plant General Manager / Automotive Manufacturing/ Passion for Strategy/Operations/Turnarounds/Building Excellence/People and Process Oriented
In a previous article, I underlined that operational excellence is not enough to save a company from struggle , if it has the wrong strategic positionning.
In Automotive, more companies seem to reach what Porter called the productivity frontier, and see their operational efforts almost worthless to preserve their shrinking margins from the squeeze of fierce compeition.
At first view , Aptiv seems far from being one of those.
Having that said, it remains that Aptiv Stock is struggling to recover its 2021 all time Highest . Last week has even witnessed a spectacular drop to almost the Covid Dip Level. (see the Graph in the article illustration)
Then comes the ligitimate question: Why?
Why a company with apparently an equally strong Execution and Strategy is paining to please investors?
Some may ligitimatelly argue that it's the case evrywhere. Except that it's not the case (at least not at the same extent). Graph1 , is showing indeed that aptiv stock is doing worst that CARZ , which is an ETF tracking considerable number of Automotive Companies.
The same if we compare to S&P500 index fund. (See Graph2)
For a better undesrtanding the pressures facing the company and why investor confidence remains tepid., I wil try to dig a little bit deeper (with no pretention to be exhaustive) by questionning 3 dimensions:
1- Financials
From 2012 to 2023, Aptiv's revenue grew at a compounded annual growth rate (CAGR) of just 2.4%, which is modest considering its efforts to expand through acquisitions, divestments, and restructuring. Although the company has maintained positive revenue growth, its profitability metrics tell a different story. Profit after tax (PAT) grew at a higher CAGR of 8.9% during the same period, yet this growth was primarily due to one-off items rather than sustainable performance.
For instance:
When adjusting for these unusual items, Aptiv’s pre-tax profit (PBT) declined at an annual rate of 1.2%, reflecting a less favorable performance. This poor PBT trend aligns with a decline in gross profitability over recent years, underscoring the company's struggle to translate revenue growth into consistent profit increases. Part of the reason for the declining PBT has been the growing gap between gross profit margins and increasing Selling, General, and Administrative (SGA) expenses. (See Graph3)
2-Strategic Moves: Bold or "Me too" Moves
Acquisition of Wind River: Innovation or Trend-Following?
In January 2022, Aptiv acquired Wind River, a software provider for intelligent edge solutions, for $4.3 billion. This acquisition was intended to bolster Aptiv's presence in software-defined vehicle architecture by leveraging Wind River’s expertise in real-time operating systems and connectivity solutions. However, critics argue that this acquisition mimics similar moves by competitors, positioning Aptiv within a crowded field rather than offering a unique advantage.
Financially, the $4.3 billion acquisition has increased Aptiv’s debt without a clear, immediate impact on revenue. Wind River’s integration costs and associated R&D investments have contributed to declining earnings. In Q2 2024, Aptiv reported adjusted EBITDA of $650 million—a 3% year-over-year decrease, partly attributed to Wind River's integration expenses (source). With other automotive technology providers like Bosch and Continental heavily investing in connected vehicle technology, the Wind River acquisition may take several years to deliver substantial returns, and it remains uncertain if it will significantly differentiate Aptiv in the industry.
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Joint Venture with Hyundai: Motional’s Promise and Financial Burden
Aptiv’s $4 billion joint venture with Hyundai, known as Motional, focuses on developing autonomous driving technology. Launched in 2020, Motional has partnered with companies like Lyft to conduct autonomous vehicle testing, positioning itself as a player in AV development. However, autonomous driving technology remains capital-intensive with uncertain profitability timelines. In 2023 alone, Aptiv allocated over $400 million to Motional, yet revenue contributions from the venture remain minimal, putting a strain on Aptiv’s overall earnings (source).
While Motional aligns Aptiv with the future of mobility, it faces fierce competition from Waymo, Tesla, and General Motors’ Cruise, all of which have invested billions in AV R&D. With commercial viability for autonomous vehicles still years away, Motional’s costs continue to weigh on Aptiv's profitability, leading to perceptions that this joint venture is more about keeping pace with industry trends than establishing a unique edge.
Divestment of Legacy Businesses: Streamlining or Risking Stability?
In 2020, Aptiv divested its traditional internal combustion engine (ICE) component manufacturing, aiming to streamline its focus on high-growth segments like EVs and connectivity. This divestment improved gross margins, which reached 19.6% in 2023, but it has also increased Aptiv’s reliance on more volatile, capital-intensive sectors (source).
This shift away from stable revenue sources has placed greater pressure on newer, riskier segments. For instance, Aptiv’s EV and ADAS technologies rely heavily on costly materials like lithium and semiconductors, exposing the company to inflationary pressures. In the first half of 2024, Aptiv’s operating margin dropped to 6.3%, down from 8.1% in 2022, as rising costs took a toll on profitability (source). This divestment, while forward-looking, has left Aptiv more exposed to market volatility, raising questions about whether this was a proactive strategy or an attempt to conform to industry trends without fully accounting for the loss of stable cash flows.
3- Declining Operational and Capital Efficiency
Gross Margin and SGA Challenges
Aptiv’s declining operational efficiency is evident in its gross margin, which has compressed over time while SGA costs have steadily increased. Since 2016, the gap between gross profit margins and SGA margins has narrowed significantly, signaling that while revenue growth was achieved, it has been offset by rising operational expenses. This shrinking margin has negatively impacted operating profitability, reflecting Aptiv's challenges in managing costs effectively as it scales.
Impact of Strategic Moves on Efficiency
Aptiv’s acquisition of Wind River for $4.3 billion in 2022 was meant to improve software capabilities, but the integration has added substantial costs without a proportional revenue increase. In the second quarter of 2024, Aptiv reported an adjusted EBITDA of $650 million, down 3% year-over-year due to the high integration and R&D costs linked to Wind River. Similarly, the joint venture with Hyundai, Motional, has been another capital-intensive endeavor. In 2023 alone, Aptiv’s expenditures on Motional exceeded $400 million, and with autonomous driving technology still years from profitability, Motional has placed a considerable strain on earnings (source).
Deteriorating Capital and Operational Efficiency Metrics
Graph4 data on Aptiv’s operating and capital efficiencies shows a worsening trend since 2015. Key efficiency metrics like Asset Turnover, Inventory Turnover and cash conversion cycles have declined in a continuous way. Over the same period, fixed costs as a percentage of total costs increased from an average of 11% in 2012-2013 to around 13% in 2022-2023, further eroding profitability. Despite Aptiv's larger revenue base in 2023 compared to 2012, its returns to shareholders have diminished, signaling that growth has come at the expense of profitability.
Aptiv’s share buyback program, a $5 billion commitment aimed at supporting EPS in the short term, has further reduced the company’s flexibility to invest in growth initiatives. While the buyback temporarily boosts EPS, it doesn’t address long-term growth needs, particularly in an industry where ongoing R&D and innovation are critical for competitiveness. With high-cost projects like Motional and the integration of Wind River, Aptiv’s capital efficiency has suffered, and declining returns on investment have raised investor concerns.
4- Competitive and Economic Pressures
All above internal factors, don't exclude the impact of external ones.
Aptiv operates indeed in an environment where established automakers and tech-driven startups are competing aggressively in EVs, ADAS, and autonomous driving. Competitors like Tesla and several Chinese EV companies have developed leaner structures and faster innovation cycles, challenging Aptiv’s ability to compete. Aptiv’s strategic investments in acquisitions and R&D have added cost pressures, while its relatively slow revenue growth has further hindered stock performance.
In addition, economic factors such as inflation and rising interest rates have heightened investor caution, especially toward companies with high-cost structures and significant R&D spending. This challenging economic environment has amplified Aptiv’s internal inefficiencies and increased skepticism about its ability to achieve sustainable growth.
To Sum Up
Aptiv’s investments in software, autonomous driving, and EV technologies reflect its commitment to future mobility, but a lack of immediate returns and limited market differentiation has kept its stock under pressure. To capitalize on its strategic positioning, Aptiv must demonstrate that its initiatives provide unique, tangible value beyond just aligning with industry trends.
By focusing on disciplined cost management, operational agility, and more strategic capital allocation, Aptiv has the potential to bridge the gap between its vision and financial outcomes. Turning its strategic investments into profitable, distinct advantages could help Aptiv regain investor confidence and establish itself as a leader in the next era of automotive innovation.
The strength of its Operational System and Execution ability could definetely be a way to solve the sus-mentionned efficiencies, and thus inspire more more confidence to Investors.
References:
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3 个月This stock has come no where close to the COVID dip of sub $30, this stock does seem like a great value option now that debt to equity is under 1.