Thursday, September 1, 2016

Your Vehicle is Now Worthless - Part 3 Investing in Self-Driving Cars

If you're getting tired of me saying your car is worthless tough.  Just accept it for what it is and get yourself over to a local bicycle shop for your new wheels.  It's good for the pocket book, good for your health, and good for the environment. I'll even show you being environmentally friendly can make you a millionaire in an upcoming article.

But onto the good stuff. We love investing here and what better way to do it than with the next wave of future technology.  Your neighbor down the street, the wise men at the bar, and even the clerk at 7-11 all chime in about self driving cars being the future.  You can feel the riches already sprouting into your own money tree like this one here.

You want to invest so badly you can't wait to hit the BUY button on anything! You don't care what it is so you rush straight home
in that financed cement boot anchor of yours. You fire up the old online brokerage account, and before you know it tickers are flying left and right all over the place.

Whoa hit the brakes!!! Take a deep breath. Let's make sure none of our investments turn into roadkill. So instead we shall take a nice leisurely stroll through our investment options since we don't want to compound another bad decision.

Uber - Is the biggest name in the space but it's a private company. They not only recently announced an acquisition for a driver-less truck company, but are the leading ride-share company.  It also helps they've landed plenty of VC money reportedly valuing them anywhere from $35-$50 billion. But you don't have VC money(yet). So this one is off limits for now, but of course we'll keep our eye on it because it might end up the best way to play this theme.

Ford(F) - Since their announcement is what inspired this whole series of articles we should take a look at one of America's most iconic companies.  The company is CHEAP by many metrics their P/E(ttm) is 5.80, PEG is 0.74, and it trades for 0.33x annual revenues*. Also they are sporting a big juicy 4.85% dividend.

There must be a reason why this is such a deal. So we check out its competitors General Motors, Toyota, and Honda. All trade very cheaply with the exception of Honda which trades at a higher valuation relative to it's competitors(but lower than the overall market).

I never like it when I see an industry as a whole trade this cheaply and I can't ascertain why.  After all vehicle sales are near record highs in the US again. Is it possible the market is wrong and these stocks are undervalued? Maybe new manufacturing techniques will make their operations more efficient and profitable. All plausible events. It's also entirely possible the market is correct and its discounting the value of these behemoths for what it sees as lower future earnings. Maybe they see less cars on the road, or some other scenario that means less profits for automakers.  Not such an easy call is it?

Tesla(TSLA) - Is probably the poster child for this whole movement.  Their cars were among the first on the road with semi-autonomous driving available. Yet the company is insanely overvalued, it's trading solely on what people expect it to earn in the future. Their metrics are horrible. So much so I'm not going to give you Tesla's investment metrics because it's not worth it at this point. Yes the stock might go up, but for the amount of risk you have to take on it's a bad deal. Yes they have awesome technology, but remember that doesn't always translate into profits.

The company hasn't even sold 100k cars a year consecutively yet, and it's valued at $33 billion. Ford & GM which have a long history of success(and some not success), but sell millions of cars a year are valued way cheaper.  So I'll give you this info. Ford and GM have a combined market cap of $100 billion. They sold 16.3 million cars worldwide last year. Tesla recently set a 500,000 vehicle sales target by 2018. Which do you think makes more sense?

Their merger with SolarCity makes it even more convoluted. Especially since neither company has posted a profit in the last 3 years.

Alphabet(GOOGL) - Maybe you heard of them. If not no biggie. Anyway they have their own self driving vehicle that's been getting pulled over and hitting buses. Awesome! The problem is they haven't released many details as to how they plan on making money off this.  It looks as if they'll be providing the mapping & software a car uses to run itself. Either way the company is highly successful. If that's the case then their entry into the market will augment the current business model. This also puts them in direct competition with our next company.

The company has a P/E of 30 which is high, but in line with other top quality companies right now. They have a gross profit margin of 62%, and net income profit margin of 20% for most the last few years(very solid). They even have $76 billion worth of cash and only $6 billion worth of debt.  In fact their balance sheet by many metrics is solid. Unfortunately it was just trading at a much better $700/share earlier this summer, but has now corrected itself back up to $800. Still it's a great company that's worth a look for plenty of reasons.  

Mobileye(MBLY) - This company actually notes Alphabet as a prime competitor in it's Annual Report.   They provide a whole suite of technological driving solutions to automakers and part suppliers. By 2018 the company expects it's products to come installed in nearly 300 new vehicles.  Some of their solutions are adaptive cruise control, pedestrian detection, and vehicle detection.

Mobileye is currently valued at over $10 billion, but only has $300 million in revenue the last year so it trades at over 33x revenue. Compare that to Fords 0.33 valuation.  It's valued as a growth stock with a P/E over 123(ttm), but it has seen nice increases in Revenue(58%) & EPS(75%) growth. The company is also sporting a good net profit margin (33%), and operating metrics with ROA at 10.88% and ROE at 17.68%. The company has no debt on the balance sheet which isn't unusual for a tech company.

But here just like Tesla you are paying up mightily today for tomorrows expected earnings. If Google(Alphabet) wasn't going to be their main competitor I'd be less worried. The company already has plenty of relationships with top manufacturers around the world. In fact by 2018 the plan to be in nearly 300 vehicles. They also make money, yet that alone doesn't make it an easy buy. Still Mobileye is one of the more promising names in this space.

Unfortunately it's not easy to buy directly into the bicycle market. The closest anything comes is Dicks Sporting Goods(DKS), or Vista Outdoors(VSTO). These aren't pure plays however. All the major bicycle manufacturers in the US are privately held, and there are only a couple available on international markets.


So these are the main areas you can invest most directly with the upcoming self-driving revolution. I did not analyze every auto-manufacturer, and part supplier which are ancillary plays too. But remember this technology is still young.

At one time the old stodgy railroads were considered the technology of the future.  The famous Panic of 1873 is attributed to over-speculation in railroad stock and expansion. Many investors lost a fortune. Of course over the ensuing decades plenty of money was still made.  I bring this up because there is always an opportunity to invest in amazing new technology.  Even Warren Buffet took plenty of time to get into the rail road industry.  He waited until November 2009 with his buy of BNSF.

So don't get ahead of yourself and hit the BUY button today.  Take some time to research, and let good prices come to you.  Remember it's much harder to get rich buying quality assets at high prices than it is to buy quality assets at low prices.

*Here you take the company market cap divided by annual revenues(marketcap/annual revenues). In this case $49 billion / $150 billion = 0.33.

**Update - Here is an article on Ford's self driving car program

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