Tech stocks are getting pounded lately. Almost all the FAANG stocks whiffed on earnings, with Apple (NASDAQ:AAPL) providing the latest blow to the sector. As a result, we’re seeing a bunch of exciting, high-growth companies whose shares are down 20%, 30% or even more since the start of October.
As such, it’s time to go shopping for growth companies, as this is arguably the biggest correction since early 2016. And what better place to be on the lookout for bargains than in autonomous vehicles?
It seems that we’re just a few short years away from self-driving cars becoming a major commercial force. As a result, this could be one of the last chances to get in on the ground floor for some of these stocks before they see parabolic revenue and earnings growth.
Unfortunately, like with most game-changing new technologies, there will be as many losers as winners. Dozens of car companies went public in the early 1900’s, yet only a few were consistent winners for shareholders. Similarly, for every Apple that made investors massive returns, there were a bunch of Wang Computers that spectacularly flamed out.
That’s why it’s important to take a look across the whole connected car space to see the different investment options. Not all of these seven stocks will be long-term winners. Nor do I see all of them as buys at today’s prices either. Let’s look at these seven autonomous vehicle stocks and see which are the best options following the huge sell-offs around tech stocks lately.
Let’s get the obvious one out of the way first. Tesla (NASDAQ:TSLA) attracts a lion’s share of coverage about the future of vehicles. A lot of people own TSLA stock and see it as the inevitable winner in the competition to dominate the future of cars. Particularly among younger investors, I see people buying TSLA stock as a buy-and-hold-forever sort of play.
This is a dangerous mindset.
Arguably, Tesla’s seemingly strong position in this space is largely due to Elon Musk. His charismatic personality and bold projections on his Twitter and in interviews have created a mystique. Musk has at times suggested highly futuristic capabilities such as a summon feature that would allow your vehicle to drive to you from wherever it was currently parked. Musk previously suggested that by the end of 2018, a Tesla vehicle would be able to drive coast to coast without human intervention.
Alas, Musk has written some checks that so far he hasn’t been able to cash. Tesla has fallen well short of its development timelines. Furthermore, Tesla arguably is well behind the competition in developing a fully autonomous vehicle.
Tesla could certainly catch up and be the ultimate winner. At this point, however, Tesla’s huge valuation is hard to justify based on its connected car ambitions. With criminal probes into Tesla, Musk’s provocative behavior throughout 2018, and the company’s aggressive accounting, I’d consider shorting TSLA stock here rather than buying it. There are other autonomous vehicle stocks that look more immediately appealing.
General Motors (GM)
While General Motors (NYSE:GM) gets far less media attention than Tesla, it is a serious player in the connected car space. In fact, it may be the leader.
According to a Detroit Free Press article from earlier this year, the company’s autonomous vehicle project, GM Cruise, “is running neck-and-neck with Waymo, a subsidiary of Google (NASDAQ:GOOG, NASDAQ:GOOGL), to be the first to bring fully autonomous cars to market.”
GM is already developing its own Uber-like ride-sharing service, including an application and dispatch service called Cruise Anywhere. Things are moving quickly for GM Cruise. Purchased just three years ago, it’s up from 40 employees to more than 700 today. Its valuation is now estimated at greater than $10 billion and features Softbank as a high-profile backer.
Obviously General Motors has a lot of historic baggage. While it has come out of the reorganization after the financial crisis reasonably well, many long-term concerns remain, including pensions and reputation. That said, if Tesla flames out, it’s not hard to imagine General Motors leading the North American autonomous vehicle race, delivering ample profits for its loyal shareholders.
For investors who missed out on the rise of Tesla, NIO’s (NYSE:NIO) recent IPO may offer a similar opportunity — key word being “may.” NIO just reported its first significant quarterly revenues earlier this month. As such, that puts it back around where Tesla was many years ago when it was delivering its first Model S units to customers.
That said, NIO showed a huge ramp in production, from 100 vehicles in Q2 to more than 3,000 this past quarter. That’s a solid trajectory.
NIO is most differentiated from Tesla is one major way — NIO doesn’t manufacture its own vehicles, instead handing off that responsibility to another Chinese firm. This allows NIO to focus on its core strengths, rather than potentially getting stuck in what Elon Musk famously termed “production hell.”
Don’t be fooled by the low apparent share price. NIO has a huge base of outstanding stock, and as such, even at a $7 share price, it still has a rather meaty $5 billion-plus market cap. That said, if it gets anywhere close to Tesla’s level of valuation, that $5 billion could easily multiply several times over.
For now, I do agree with Luke Lango’s recent article saying that “investors should wait for more clarity before buying the shares.” It’s definitely one to keep on your watchlist, though.
An old market adage is that during a gold rush, the people selling the picks and shovels make the most money. As such, it’s worth considering a few of the semiconductor companies that make the chips that power autonomous vehicles. While the auto industry is famously ruthless and has low profit margins, semiconductor companies tend to have more insulation from competition. Patents and proprietary knowledge go a long way.
The thousand-pound gorilla in the connected car space is Nvidia (NASDAQ:NVDA). The company quickly realized the potential for autonomous vehicles and has invested heavily in R&D there. Investors have richly rewarded Nvidia for its leadership in this huge emerging market opportunity.
That said, I think the market got ahead of Nvidia’s business. The company benefited from a few other positive developments, such as the now-ended cryptomining boom, to show huge profit growth. Now that its growth is decelerating, the company is experiencing a sharp contraction in its valuation. As I warned recently, the selling could go on for awhile.
Nvidia has great long-term prospects both among autonomous vehicle stocks and in other promising lines of business. However, they’re far from the only player, and it remains to be seen who will eventually dominate the space. NVDA stock would need to decline significantly for it to be an attractive play on connected cars.
Intel Corporation (INTC)
At the time, Intel (NASDAQ:INTC) took a lot of heat for its purchase of Mobileye. It paid up for the acquisition, and there were serious concerns about the quality of the company’s technology.
However, Intel seems to have made a good move. Mobileye combined with Intel’s prodigious R&D budget has certainly created a credible competitor in the category. And Intel shareholders will soon see just how well the autonomous unit is working.
Recently, Intel announced an exciting partnership with Volkswagon to launch self-driving taxis in Israel in 2019. Volkswagon will provide electric vehicles and Intel the autonomous driving technology. Israel’s Champion Motors will handle fleet management. The partnership envisions having several dozen vehicles in the field in 2019, expanding to hundreds within three years.
An Intel spokesperson said that, “This is not a pilot project […] The joint venture is the first of its kind targeting Level 4/5 commercial [Mobility as a Service].” If Intel can catch up, let alone surpass, GM Cruise and Waymo, it’d offer substantial upside for INTC stock. Investors have long viewed the company as a boring dividend play, as the company’s cash cow is no-growth PC chips. As such, investors can get a strong highly profitable business with a upside option if Mobileye ends up performing strongly in coming years.
Texas Instruments (TXN)
Next up, Texas Instruments (NASDAQ:TXN) is my favorite stock in the connected car space. The company is a bit under the radar in the field, as it isn’t involved in as many splashy media events.
However, the company’s sensors are pivotal to much of the self-driving technology arena. Texas Instruments has long specialized in analog chips. These are able to take real-world data such as temperature, precipitation, wind speed and other such factors that are essential knowledge for a self-driving vehicle. The company also produces sensors that provide radar systems for self-driving vehicles. Texas Instruments is also targeting up and coming applications such as drone delivery and factory robotics with these industry-leading sensors.
Texas Instruments has largely avoided the bloodbath that has occurred in the rest of the semiconductor industry, where competition to make chips for fast-changing products such as iPhones lead to huge R&D costs and slim profit margins. Analog chips, by contrast, have a much longer lifecycle. And due to generally costing less, they tend to attract less competition.
Regardless of which automotive company ends up winning self-driving vehicles, they’re likely to utilize Texas Instruments equipment for various essential computing tasks. Teardowns of electric vehicles from various brands have confirmed this to date. With TXN stock down more than 20% in recent weeks, it’s not yet at a cheap valuation, but at 18x earnings, it’s a reasonable price for a highly profitable blue chip with both a strong dividend and solid growth prospects.
Blackberry (NASDAQ:BB) certainly isn’t the investor darling that it was a decade ago anymore. Its collapse in the cell phone market will be a long-studied story of failure for MBA students in years to come. That said, Blackberry is still very much in business, and their pivot to the automotive market could work out well.
Even as it was apparent that Blackberry could no longer compete in phones, their reputation for security solutions remained unparalleled. The company still knew how to design top-notch solutions for higher-risk applications. That set the company up nicely to attempt to become the leader in autonomous vehicle security, as there is really not much scarier than your car getting hacked remotely.
Blackberry’s aim is nothing short of market domination — they want to be the operating system for every autonomous vehicle in the future. And like with phones, they appear to have an initial edge against much of the competition. That’s because they made a seemingly genius $200 million acquisition for QNX back in 2010, before most were thinking about self-driving vehicles.
Will Blackberry be able to reclaim its former greatness? At a $5 billion market cap, with the company being slightly profitable, investors aren’t paying too great a price to wait and see.
At the time of this writing, Ian Bezek owned INTC and TXN stock. You can reach him on Twitter at @irbezek.