Tuesday, August 23, 2016

The Self-Driving Investment

OK so I guess I'll admit right off the bat the article headline is just slightly mis-leading.  Today I want to talk about Ford's announcement to produce fully autonomous vehicles. In case you aren't aware there are already fully autonomous vehicles on the road.  A prime example is Google's self driving car fender bender fiasco.

But technology is always a hard area to invest with individual companies. Premiums are quickly bid up, and you never know when the next change is around the corner. Unfortunately technology is essential to growth, but is best had in a passive index fund in my opinion for the majority of people. Or basically by a fund which tracks the Nasdaq.

A lot of people want to invest in this area since they see it as the next "Big Thing".  Tesla has been made famous by their super fast electric vehicles ability to change lanes and park itself.   A process it gets even better at over time.  Their technology was provided mostly by Mobileye(MBLY) until their recent decision to part ways.  Mobileye is one of the few publicly traded companies out there with this type of technology, Google is another, and it's speculated Apple is in on the game too. The problem is it's not so easy to invest in this area outside of traditional automakers.

Each represents their own challenges. For one MBLY is trading at a pretty high valuation, although the pullback that ended in February did provide a decent opportunity for those willing to take some risk. They aren't the only ones with this technology. In fact it appears Ford developed their technology with in house engineers and other companies. They never even mention Mobileye in their recent press release. Reminds me of cell phone companies in the 90's and early 2000's. Just ask investors in Blackberry, Motorola, or Nokia how they have fared. Unless the company can continuously outdo the in-house technology from automakers, and competitors, it will be tough for them to maintain this premium.

Google is predominantly a search and advertising company that's slowly morphing into a content/data/business services enterprise.  I don't doubt they'll figure out a way to get a piece of the action, but it's not going to be their focal point which doesn't make it a clear cut investment in this space right now. The stock has been an absolute beast in performance terms so maybe its best to own it for what it is.

Apple is the technology investors poster child. The company initially had a lot of success. Almost went bankrupt, and then came roaring back into the worlds most dominant company.  If it does turn out they have some type of technology they've been developing in the field it might be an intriguing play. But for now count them out of the self-driving vehicle scene. 

Tesla on the other hand is in my opinion not fit for most investors right now. I just like to look at this metric to make my point. They are valued at $33 billion right now. But they barely sell 100k cars each year. That means each car is worth $330k in market cap. Compare that to any other major automaker selling millions of vehicles with reasonable market caps. Whether or not Tesla can meet it's forecast to sell 500,000 vehicles by 2018 remains to be seen. Even if they do reach that milestone each vehicle sold in market cap terms is worth $66k right now. Hope they don't slip up.

That leaves the other automakers. They'll be the ones making the actual vehicles as always so no change here.  However I don't see margins getting miraculously huge because of this.  At first their major self-driving cars customers will be companies using these vehicles for profit. Or in other words the dreaded fleet- vehicle sale accompanied by thin margins. The buyers own profit motive will drive them to seek low prices, and will likely buy in bulk to negotiate discounts.  That doesn't sound like margin expansion to me.  But plenty of them have plans to introduce fully autonomous vehicles. I think in the automotive space let a few other companies release details of their self-driving plans and go from there.  Whoever gets the biggest lead with the best looking technology might keep a leg up on the competition for awhile.

It doesn't mean the performance of any of these companies will be bad, or that lots of money will be made in this sector.  I'm betting there will be at least a couple of names that benefit greatly from this trend. What I do know is that it's too difficult to pick a winner right now.  These cars aren't even for sale yet with the exception of Tesla's semi-autonomous models. So for now I'd stand pat and continue to invest in solid companies that sell great products, have wide moats, and a solid operating history. Just like the ones found in our portfolio.

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