Driverless Cars are Coming: Why Investors Need to Pay Attention

Six years, 1.7 million miles.

That’s how long and how far Google’s driverless cars have traveled so far on U.S. roads without any major collisions at the fault of the vehicle.

Considering that the average U.S. driver reports an accident roughly every 165,000 miles driven, Google’s track record is impressive, to say the least… Yet with the data from Google being both vague and self-reported, it’s been difficult to determine exactly how safe and autonomous these vehicles really are.

The primary cause of skepticism over the autonomy of Google’s vehicles comes from the fact that for every mile recorded so far, there have been safety drivers behind the wheel to intervene if the car makes a mistake. For all we know, these safety drivers could be preventing a slew of accidents that would have otherwise been inevitable.

Well, in Austin, Texas, Google is now looking to put this skepticism to rest. For the first time in history, autonomous cars will traverse U.S. roads completely on their own.

Now, if that doesn’t blow your mind, I’m not quite sure what would. There will literally be Austin citizens who look over at the car next to them while driving only to find it completely empty.

It’s all as exciting as it is unnerving, and it’s only going to get crazier from here.

Not if but when…

In recent years, a growing number of analysts have begun hashing out their ideas on what the future of transportation in a world of self-driving cars will look like.

Of course, no one knows exactly what will happen, but the overwhelming consensus is that the effects will be far-reaching, highly disruptive, and happen quicker than you might think.

Here are a few of the most commonly agreed-upon predictions:

• Connectivity apps such as Uber, Lyft, and Google’s RideWith will join forces with automakers (or manufacture their own vehicles) to offer autonomous vehicle services — entire fleets of driverless taxis you can order straight to your door from your mobile device.
• By removing the need to pay drivers, these services will cost 50% to 90% less than they do today, sparking widespread adoption.
• Widespread adoption of such services will reduce the amount of vehicles needed to accomplish our transportation needs by between 75% and 90%.
• This reduction will not come from active cars on the road but inactive, parked vehicles. Urban real estate dedicated parking will eventually be repurposed.
• While there will be a comparable amount of active vehicles, there will be less traffic due to more efficient driving patterns of driverless cars.
• Initial models will hit the roads within the next two to five years.

For public investors, this is not just a matter of intellectual interest — it represents a major economic shift that could greatly impact your portfolio. Anyone with exposure to the transportation industry absolutely needs to pay attention to this trend.

What to Buy

On the long side, there are a number of segments to play.

In terms of ride-sharing, you have mobile apps from companies like Uber, Google, and Lyft. You also have navigation companies like Telenav (NASDAQ: TNAV) and Nokia’s mapping division, which was recently purchased by German automakers BMW, Daimler, and Audi.

On the commercial end of navigation, you have fleet management for the trucking industry. Specifically, you have the niche telematics market, made up of software companies that will track and manage trucks much in the way Uber does its taxi fleet.

Another segment well worth paying attention to is internal component providers. Companies like Mobileye N.V. (NYSE: MBLY), Autoliv Inc. (NYSE: ALV), and Nvidia (NASDAQ: NVDA), among several others, will help drive adoption by building the technology that lets driverless cars “see.”

According to the IEEE, driverless car microcontroller and processor units will be a $500 million market by 2020, up from $69 million in 2014. With demand in smartphones and tablets beginning to settle, driverless vehicles are becoming the next big growth vertical for the semiconductor industry.

What to Sell

Of course, you also have major automakers like Audi, Toyota, Tesla, and Mercedes, which are aggressively pursuing the driverless car trend. Unfortunately, the aforementioned consensus of 75% to 90% vehicle reduction suggests these companies might just be digging their own graves.

This brings us to the short side of driverless cars, which is ironically the automakers themselves. If we’re to take the expected rates of vehicle reduction seriously, it’s difficult not to envision a complete collapse of the auto industry, especially for those that are not currently developing driverless car technology.

Call me crazy, but driverless car technology is likely to make automotive stocks some of the most dangerous long-term equities on the market, even despite their relatively low valuations and generous dividend payouts. Between automation and the rapidly growing sharing economy, I can’t see this industry doing anything besides shrinking.

So let me leave you with a rather bold prediction: Remember the automotive crisis of 2008-2010? Well, the coming collapse is going to make it look like a walk in the park.

This time, sales won’t just fall 30% — they’ll plummet 75%. They won’t rebound this time, either, because falling demand won’t be the result of rising gas prices and too many guzzlers but rather of permanently increased efficiency in transportation methods.

And this time around, you can count out the possibility of a bailout. The premise that these companies are simply “too big to fail” will be eclipsed by the reality that their failure is inevitable.

Until next time,

Jason Stutman

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