Last week, there was another major breakthrough for autonomous driving as Google’s (GOOG) Waymo launched a limited trial of its self-driving taxi in parts of Phoenix, Arizona. Currently, the car does require a human driver to be present to override the system, but now Waymo will be testing fully autonomous taxis.
In addition to Google, Tesla (TSLA) is also working on a self-driving taxi. The feature would, in essence, allow every Tesla car to work autonomously. The feature would allow owners to make money from their cars.
These developments are a gamechanger for multiple reasons. It will disrupt existing ride-sharing and delivery companies. It could also be a major profit and growth driver for the companies that can figure out this technology and most importantly, ensure that it’s safe. In the long-run, it could transform cities which could be redesigned if there is no need to park cars.
The total addressable market for autonomous driving is in the trillions. Similar to how new industries like social media, eCommerce, and search have spawned trillion-dollar companies, I think it’s likely that the self-driving industry will also lead to similar outcomes.
Every technological disruption creates winners and losers. Lately, technology industries have become winner-take-all or a couple of winners-take-all. We see this in e-commerce, cloud computing, social media, search, etc.
Of course, a winner-take-all environment also means that most companies will fail. I believe that self-driving will follow the same script. For the self-driving industry, the introduction of autonomous taxis could be an inflection point, where Tesla and Google gain an insurmountable lead.
Winners and Losers
Self-driving is like search and social media, in that the product improves with more people using it. Each interaction gives more feedback which can be integrated to improve the product. So Tesla has an advantage given that its technology is already on the road in its cars. And, it will only increase if it has a ride-sharing network and eventually fully-autonomous taxis.
Google will be another winner as it is also ahead of its peers in the race to bring self-driving cars to market. Another winner is Nvidia (NVDA), who makes chips that are used in autonomous vehicles.
The most obvious losers will be ridesharing companies like Uber (UBER) and Lyft (LYFT). Another potential loser with this development is Amazon (AMZN), as it’s working on its own self-driving product which faces the risk of falling behind.
Along with TSLA, GOOG is in the lead with its self-driving cars. Unlike TSLA, GOOG is not going to manufacture cars, it will likely license its software and self-driving tech to other car companies.
Google also has a massive amount of resources to invest in Waymo, since its search engine is so profitable. Further, the company is desperate for another hit product as its growth and revenue have slowed. Its competitors like Facebook (FB), Microsoft (MSFT), and Apple (AAPL) have much higher growth rates than Google and have been successfully able to generate revenue in multiple segments. The last quarter marked Google’s first quarter of declining revenue since it became a public company.
A breakthrough in self-driving technology that could be licensed to other car companies who would be charged a subscription fee would certainly qualify. Google believes this tech could have a transformative impact on the world. It would also result in fewer cars on the road which means less traffic and fewer accidents. Fewer accidents mean that cars could be lighter and cheaper which would bring their costs down as well.
The POWR Ratings rate Google as a Buy. It has an “A” for Trade Grade with “B” for Peer Grade, Buy & Hold Grade, and Industry Rank. Among Internet companies, it’s ranked #19 out of 58th.
In a first-quarter earnings call, CEO Elon Musk laid out his vision for Tesla’s self-driving taxis. The first step is the company will be releasing software that enables fully autonomous self-driving cars, where a vehicle can get from Point A to Point B. It will still require a human driver to oversee it. Musk expects this to be completed by year-end.
The second step is to roll out the robo-taxi software which would allow people to use their Teslas to give rides to people with a ride-hailing app. This would be autonomously driven but still require a human in the driver’s seat. The timeline for this is sometime in the latter part of 2022.
The third step is to remove the human driver which would give every Tesla the capability to generate money for an owner if they wish. It would also totally disrupt the ride-sharing market and significantly bring down the cost. Musk was unsure about the timeline because it would require regulatory approval, however, the technology could be ready by 2023.
Tesla is one of the leading companies in autonomous taxis as well as other fast-growing markets including electric cars, batteries, and electric trucks that could each be trillion-dollar industries.
Its POWR Ratings are consistent with this strength as it’s rated a Buy. It has an “A” for Trade Grade and a “B” for Buy & Hold Grade, Peer Grade, and Industry Rank. Among Auto & Vehicle Manufacturers, it’s ranked #4 out of 29.
NVDA gives investors exposure to some of the most innovative parts of our economy including crypto, VR, data centers, AI, machine learning, and autonomous driving.
In the last quarter, automotive revenue was $111 million, accounting for 3% of the company’s revenue. In terms of autonomous driving, NVDA is moving up the value chain by offering a full end-to-end platform to automakers and recently struck up a partnership with Daimler that will make Nvidia the provider of self-driving software in Mercedes vehicles by 2024.
Its recent purchase of ARM Semiconductors will also increase its chances of success. ARMS has a partnership with Toyota Motors (™) and General Motors (GM) to create a common architecture that would standardize chips and systems in self-driving vehicles. It also created a new chip design to handle data coming from sensors used by cars.
Therefore in addition to TSLA and GOOG, NVDA is another company positioned to thrive as this sector takes off. Its chips are used in other companies’ systems, and it’s also designing its own solution that will be licensed to automakers.
NVDA is rated a Strong Buy by the POWR Ratings. It has an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank with a “B” for Peer Grade. Among semiconductor stocks, it’s ranked 15th out of 86.
The biggest potential losers are the existing ride-sharing companies. Fully autonomous taxis are an existential threat to their business model. In fact, these companies would likely have to invest in their own fleet of autonomous vehicles which would be prohibitively expensive.
It would be an especially bitter pill for Uber who has invested considerable sums into autonomous driving. Despite spending $2.5 billion, a recent report from The Information reveals that these efforts have failed to bear fruit as its prototype is still failing to complete basic maneuvers.
LYFT will struggle for the same reasons as Uber. However, it’s smaller and has even fewer resources, so its chances of survival would be less. Even if ride-sharing is disrupted, Uber could limp along with Uber Eats and Uber Freight, however, Lyft is completely dependent on ride-sharing.
Lyft and Uber’s business is based on connecting riders and drivers and then taking a cut of each transaction. While drivers do much of the work, the ride-sharing companies capture the bulk of the value due to the leverage of their platform. With autonomous vehicles, Uber and Lyft would lose their leverage, and owners of the autonomous vehicles would be able to capture it as no there would be no need for a third-party.
This summer, AMZN bought Zoox, a self-driving car startup for $1.2 billion. At one time, Zoox was thought to be neck-and-neck with TSLA and GOOG. However, the company hit some stumbling blocks and its need for funding resulted in a sale.
Recently, Zoox received a permit to allow its vehicles to drive on the road without a human in the car. Although this is incrementally positive, it also shows that it’s behind its competitors. Given the iterative nature of self-driving, the more miles a car accrues, the more the product will improve.
Given Tesla and Waymo’s head-start on the iterative process, it’s possible that Zoox is already out of the race as they are months or years away from putting their vehicles on the road at scale.
Autonomous vehicles are the next trillion-dollar industry that is going to have immeasurable impacts on the way we live and do business. Commutes will become an opportunity for people to relax and entertain themselves. It will change how cities and towns are designed. And, it will certainly lead to fewer accidents.
Just like other disruptive technologies, certain companies will earn billions in profit and add trillions in market cap. One less from these technologies is that once a company gains a dominant position, they start to benefit from economies of scale and network effects, which in turn, increases its market share. I believe the same dynamics will apply in autonomous driving, boosting the prospects of Google, Tesla, and Nvidia.
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TSLA shares were trading at $430.83 per share on Monday afternoon, down $8.84 (-2.01%). Year-to-date, TSLA has gained 414.94%, versus a 7.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles. More…