Today, we are happy to share the next essay in a series on the growth opportunity in autonomous vehicles from our colleague Matt McCall, editor of Investment Opportunities.
The response to his essay yesterday was so tremendous, that we knew we had to share the next essay with you right away.
Investors can take advantage of this investing trend in so many ways, and today Matt explains how you can profit from this trend without investing in any car companies at all.
We will be sharing the other essays in this series with you in a special send of the Digest, and I know you’ll find them informative and entertaining.
How the World’s Best Investors Are Investing in Self-Driving Cars
By Matt McCall
It’s 4:15 p.m. on a Friday afternoon. You head out of your office tired but looking forward to the weekend. As you reach the curb, your smartphone alerts you that your car is pulling up.
You get in and relax. Five minutes later, the door opens and your wife slides into the seat next to you.
“Are you hungry?” she asks. “I went ahead and had dinner delivered.”
As the warming drawer in front of you slides open, you can smell it is your favorite.
“What would you like to watch?” you ask her.
You tap your armrest and blackout shades descend as your seat reclines.
You agree to watch an oldie. You unwrap your prepared meals and settle in for dinner and a movie.
By the time the credits begin to roll, your wife is asleep. You tap her armrest to fully recline her seat and pull a blanket up around her shoulder.
Before long, you’re asleep, too.
You awaken to tap, tap, tap on the window. You check your watch. It is just after 7 a.m.
“We must be here,” you think. Rubbing your eyes, you push the button on your armrest. The shades rise and light floods into your car. Your oldest niece is smiling as she taps on the window.
Your self-driving car has taken you more than 700 miles as you ate, watched a movie, and got a good night’s sleep. Now you can’t wait to get inside where your mother is making her famous breakfast casserole.
I know that sounds like science fiction. It used to be. But as I detailed yesterday, we are closer than ever to it being real.
So much of typical daily life revolves around traveling by car. The development of autonomous vehicles (AVs) will transform trillions of dollars’ worth of manufacturing and service businesses.
Imagine relaxing and productive commutes even in rush hour traffic. Imagine a day of fun and games with the family inside your car as it drives you to the beach. Imagine sending your car to pick up your child from baseball practice.
It’s hard to fathom a car that can drive itself and get you safely to your destination. To help you further understand how autonomous vehicles work, where the technology is today, and where it is headed, let me explain the five levels of automation.
Level 1: Assisted. Humans are almost fully responsible for the control of the car, but there are some autonomous features in the vehicle. Think cruise control, park assist, and the like, which we have today. The vehicle is only able to perform one function at a time.
Level 2: Partial automation. The major difference moving up to level two is that more than one automated function can be performed simultaneously. For example, the car can control speed and steering via cruise control with lane centering. The driver must still be alert to take control when needed.
Level 3: Conditional automation. The vehicle can now control most driving functions. Human drivers are still necessary, but the vehicle controls speed, steering, and road monitoring without assistance. The driver will only be needed in certain situations.
Level 4: High automation. This means nearly full automation. The vehicle is able to start, drive, park, and stop. In other words, it can complete a trip on its own. This is the level at which the vehicle will be able to drive you to work and back. However, it will not be equipped to cover every possible situation. The driver may have to assist in some instances such as severe weather or an unmapped location.
Level 5: Full automation. This is it. No human needed. The vehicle will pick you up, take you where you want to go, and then find a parking spot or head off to its next pickup. This is the race currently under way, and we should see the first of these fully automated vehicles as early as 2021… less than three years away.
Profiting from Picks and Shovels
With this much at stake, many of the world’s smartest, richest, most powerful entrepreneurs and investors are working day and night to dominate the self-driving car market. The companies trying to get their share of this enormous market represent a “who’s who” of the technology and manufacturing world.
The winners of this race will see their stock market values advance 10-fold… 20-fold… even 100-fold over the coming decade.
At this stage, picking the automakers that will win the AV race is a tough task. Instead, I prefer using the “picks and shovels” approach to make money now on this huge trend.
Most investors are familiar with the picks and shovels approach to investing in a commodity boom – and for good reason. The right picks and shovels investment offers big upside yet limited downside.
The most famous example of someone getting rich with the picks and shovels approach comes from the 1850s California gold rush. After gold was discovered at Sutter’s Mill, thousands and thousands of people from all over the world rushed to California. They risked everything trying to strike it rich. Most of these people found no gold and lost everything.
Instead of taking the risky “all or nothing” approach of looking for a big strike, a smart German named Levi Strauss sold basic goods to the miners. It was a much safer, surer way to acquire wealth than trying to hit the motherlode.
Eventually, Strauss started producing a new kind of durable pants for the miners. They became a huge hit and Strauss got rich. Again, Strauss didn’t risk it all on trying to find a big strike; he simply sold goods to everyone who was looking for the big strike.
This business model – selling picks and shovels instead of trying to find or produce a commodity – is very powerful. Any time I invest in a sector, I look around for good picks and shovels plays.
In the self-driving car space, we want to own the companies that make the parts for the vehicles. Most auto parts makers will supply all the big names in the industry and become big winners regardless of who wins the races among manufacturers.
Let’s take a look at some of the parts in cars of the future.
When you think of cars, you may not be used to thinking about semiconductors. Future cars will be chock full of semis that will gather data, process it, share it, and connect to the rest of the world.
For example, Waymo’s driverless car gathers nearly 1 gigabyte (GB) of sensor data per second. That is about 100 times faster than a typical computer can download a file. Intel predicts an AV will use 4,000 GB of data over the course of a day. Just imagine the power and speed required for this to occur.
You can see in the Intel image below how data is king in AVs.
Without a human driver, an AV must be equipped with sensors to detect the environment around it. There could be up to 30 different sensors on each AV to accurately gain a 360-degree view. Most new cars already have sensors for changing lanes and backing out of a parking spot, and there are a number of companies that supply the auto industry with sensors today. In the future, sensors will be more powerful and will be the eyes for the vehicle.
In addition to the sensors, there will be cameras around the outside and interior of the AVs. One of the most important of these technologies is called LiDAR.
LiDAR is short for “Light Detection And Ranging.” It is a detection system similar to radar, except it uses light from a laser pulse instead of radio waves. The funny looking circle object on top of the AVs (see the picture below) is the LiDAR system.
The system measures how long it takes for the lasers to come back after hitting an object. The continuous pulses help create a 3-D map of what is around the vehicle.
The current global leader in LiDAR is Velodyne Lidar, a privately held company that has received investments from Ford and Chinese company Baidu.
In 2017, the automotive LiDAR market was estimated to be $325 million. By 2023, a mere five years from now, the same market is expected to balloon to $5.2 billion. That results in a compound annual growth rate (CAGR) of 59%. And it will not stop there, as continued annual growth of over 20% will push the automotive LiDAR market to $28 billion by 2032.
If you are doing the math at home, I will save you some time. That equates to an 86-bagger for automotive LiDAR growth in less than 15 years.
Alphabet and its Waymo division have a big lead in mapping, which could be a treasure trove of information for the company in the future.
There are also a number of large global companies working in the software and hardware development for AVs. One of the companies I currently recommend to my Investment Opportunities readers is a major player. Others include Intel, Nvidia, NXP Semiconductors, Samsung, Bosch, and others.
Investing in the disruption of the transportation industry is similar to investing in anything Apple-related 10 years ago. Investors who broke down the iPhone and invested in the suppliers made fortunes. The same will be said in 10 years for those of us using that approach with AVs.
In my next essay, I’ll explain just how big this industry is going to get. In preview, we won’t be measuring its impact in the billions… but in the trillions.