Shares of automotive manufacturer General Motors Company (NYSE:GM) recently popped more than 10% on news that Softbank is investing $2.25 billion in the company’s autonomous vehicle unit, Cruise.
On the same day, shares of Fiat Chrysler Automobiles NV (NYSE:FCAU) rose more than 3% on news that the company expanded its self-driving partnership with Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) to include a rollout of 62,000 self-driving Chrysler Pacifica hybrid minivans.
These are both big bets from big companies on big growth in the autonomous vehicle space. And it got me thinking: does an investment in traditional auto stocks based on autonomous and electric vehicle upside make sense?
The short answer: one part yes, and two parts no.
Here’s a deeper look.
The Bull Thesis Looks Promising
On the positive side, auto stocks like General Motors, Fiat Chrysler, Ford Motor Company (NYSE:F), Toyota Motor Corp (ADR) (NYSE:TM) and others will make massive pivots into electric vehicle production over the next several years.
As a result, these auto manufacturers will sell a ton of electric vehicles over the next several years, the bulk of which should offset lost sales from traditional vehicles.
Moreover, the autonomous driving revolution likely won’t happen without at least some assistance from automotive manufacturers. Either auto manufacturers control the whole automotive process, like GM is doing with Cruise. Or they simply partner with a tech company and are a critical part of the process, like Fiat Chrysler is doing with Google.
Either way, auto stocks do have upside through a mass-market rollout of autonomous vehicles.
All together, between electric vehicle ramp and forthcoming autonomous vehicle rollouts, the bull thesis on auto stocks looks quite promising over the next several years.
But the Bull Thesis Is Riddled With Risks
The aforementioned bull thesis on auto stocks comes with plenty of risks.
For starters, while auto stocks do have upside through autonomous vehicles, the size of that upside is unclear. The autonomous vehicle space is very, very crowded. Not only is everyone in Detroit pumping a bunch of money into the space, but so is everyone in Silicon Valley.
Who wins that foot race? Tough to say. But it is easy to say that auto stocks getting a big bump from self-driving is far from a sure thing.
Also, on the electric vehicle side, there is a not-so-insignificant player named Tesla Inc (NASDAQ:TSLA) who is presently ramping up production of a mass-market electric vehicle. In doing so, Tesla is rapidly stealing market share away from traditional auto giants.
This trend of market share losses won’t end any time soon for traditional auto manufacturers. In the auto world of 2025, there will be a ton of electric vehicles and a ton of electric vehicle manufacturers. But in that world, Tesla will be a big player. Inevitably, that means lower market share for traditional auto giants like Ford and General Motors.
Bigger picture, the whole car market is at risk right now. Rates are creeping higher. That increases borrowing costs. Higher borrowing costs have a dilutive effect on automotive demand.
But even bigger than that, growth in the sharing economy through ride-sharing platforms like Uber and Lyft has eroded the necessity for consumers to own a car. Indeed, after decades of rising, car ownership rates in the U.S. have started to decline.
This is especially true in urban areas, where car necessity was already low due to public transit and where adoption of ride-sharing is especially high. It shouldn’t come as a surprise, then, that millennials in urban areas are at the forefront of this car ownership decline.
As Uber and Lyft only grow in popularity over the next several years, the necessity to own a car will only decrease. Car ownership rates will consequently fall. And the end result will be significantly reduced demand in the auto market.
Bottom Line on Auto Stocks
The bull thesis on auto stocks through autonomous and electric vehicles looks ostensibly promising. But a deeper inspection of that thesis reveals more risk than reward.
Consequently, auto stocks aren’t my favorite investment right now. I wouldn’t be surprised to see the majority of these stocks trade largely sideways into the foreseeable future.
As of this writing, Luke Lango was long GOOG.
