Editor’s Note: This article is part of Joanna’s Top Trades — a feature dedicated toward making you money within a specific space. Joanna’s picks for this week are Innoviz Technologies (NASDAQ:INVZ) and TuSimple Holdings (NASDAQ:TSP) as the top autonomous driving stocks to trade.
If my two decades on Wall Street taught me anything, it’s to run my personal money like a hedge fund. In other words, approach every investment idea as a long-short trade. Pick a theme. Buy an undervalued stock and short an overvalued stock. With that in mind, here’s the latest in my weekly investing series designed to do just that. We’ll talk one thematic long/short trading idea every week. The theme for this week is the best autonomous driving stocks to buy and sell.
With most of us at least partly back to the office, the idea of commuting to work in a self-driving car is sounding really good. But when it comes to actually investing in autonomous driving and AD stocks things aren’t as straightforward.
First, a word of caution: autonomous driving is real, but don’t expect instant investment gratification. The truth is, there is absolutely a credible, long-term path, backed by capital, to bring autonomous vehicles to the masses. But, the path to commercialization is slow, and paved with plenty of failures.
At the same time, the market is ahead of itself. Autonomous driving stocks have moved way too fast. Most valuations make no sense. Even so, don’t listen to the short-sellers, who will tell you that this space is a “sucker’s game.” If you play it smart, and can handle the volatility while ignoring the social media noise, the long-term payoff will be worth it.
First, I’ll explain why you should buy Innoviz Technologies (NASDAQ:INVZ) stock. After, I’ll take an even deeper dive into one of the self-driving companies you should consider selling (or shorting, for braver investors).
Best Autonomous Driving Stocks to Buy
A lesser-known lidar play
Founded in 2016 and based in Tel-Aviv, Israel, Innoviz went public in April of this year via a special purpose acquisition company (SPAC) merger. Valued at roughly $1.3 billion, Innoviz is one of only a handful of publicly traded pure-play lidar, or laser-based radar companies.
Like any early stage technology, investors have plenty of reasons to be cautious. Lidar, which has been in existence for 60 years or more, is probably one of the oldest “new” technologies around. If you’re not convinced, just look at the income statements of any of these companies. Lidar is still too expensive for true mass adoption — to the tune of thousands of dollars per vehicle (although costs are coming down, slowly). But, what makes lidar technology exciting is that it’s really good at seeing — whether its down a road, at night or through fog. In a utopian (or dystopian) autonomous driving future, lidar sensor data will be processed by a car’s brain to navigate streets safely — without the need for a human driver.
The implications for the future of driving are incredible, which explains why almost every major automaker plans to use some mix of lidar, along with radar and optical cameras as the eyes of their self-driving cars. And this potential universality is the best justification for investing in lidar technology stocks.
Chicken-and-egg
Innoviz isn’t the most headline-grabbing name of the lidar bunch. The celebrity award goes to Luminar (NASDAQ:LAZR), which I’ll discuss later. And of course there is at least one well-known anti-lidar company, electric vehicle maker Tesla (NASDAQ:TSLA), whose stock everyone loves to hate lately. The enfant terrible of EVs himself, Elon Musk has expressed his disdain for lidar sensors, scornfully calling the technology a “crutch.” (Sidenote: behind the scenes, Tesla may actually be testing the technology).
There are two very simple reasons to like Innoviz: technology and economics. Whereas most lidar companies use multiple lasers, Innoviz uses a single laser that scans the landscape with the help of a tiny moving mirror (for the record, Luminar does this too; it’s just the company’s valuation that’s the problem).
There’s an obvious cost advantage to using a single laser. However, the downside is that a single laser can’t provide 360 degree coverage. But, with the AD market in its early days, this is much less important now. Companies are forced into a chicken-and-egg situation. Costs need to come down for automakers to jump in. But it’s tough for lidar companies to lower costs without scale and mass adoption. A lower cost design helps — a lot.
A hot space, a cool valuation
Like every lidar technology company, Innoviz is in the very early innings of what management thinks could be a “hockey stick” growth trajectory. Innoviz expects revenue to grow in the triple digits annually, from an estimated $9 million in 2021 to $581 million in 2025.
The self-driving space is clearly filled with promise. And wherever investors have high hopes, valuations tend to follow. So, don’t expect any bargains here.
For now, the market seems to have anointed INVZ competitor Luminar as the darling of the lidar space, owing to its early product lead and partnerships. That said, LAZR’s hefty valuation at 15x estimated 2025 sales, and a considerable short interest, at 13% of float, make for a very volatile stock. In contrast, there’s far less expectation baked into INVZ’s valuation, at around 2x estimated 2025 sales. As reference, the second most expensive name in the space, Velodyne Lidar (NASDAQ:VLDR), trades at 5x sales.
Here’s the bottom line on lidar stocks moving forward. No lidar stock has achieved the trifecta of pricing, adoption and market share. With no clear frontrunner, it makes sense to buy a basket of lidar stocks. You can buy INVZ now, as the stock isn’t overstretched, and wait to buy the others on (inevitable) blow-ups.
Best Autonomous Driving Stocks to Sell
There’s a strong business case, but with a catch
TuSimple Holdings (NASDAQ:TSP) approaches the autonomous driving market from another perspective. The self-driving freight truck company went public in April at $40 per share, and is currently trading around $75. TSP is building an Autonomous Freight Network (AFN) of semi-trucks in partnership with shippers, carriers, railroads, freight brokers, fleet asset owners and truck hardware partners. The company operates a fleet of 70 trucks throughout the U.S. and China. It claims over 2.8 million miles of road testing. TSP also has a promising partnership with truck supplier Navistar (NYSE:NAV) to build tailored trucks for its own fleet.
In theory, autonomous trucking services could solve a lot of the trucking industry’s problems. Transportation companies suffer from low profit margins as they juggle the high costs of labor, fuel, administration and equipment. Another pain point: it’s hard to find good truckers, especially drivers for long-haul trips.
Freight truck drivers, on average, drive “2500 miles per week, 10 times what the average car-driving American puts on the odometer.” To compensate for their hard work and time, shippers and carriers need to pay drivers a competitive salary. Now, consider the meteoric demand for e-commerce and increased demand for truck delivery and you have a seemingly impossible cost curve.
Commercial tech is still far away
I’m firmly in the investing camp that hopes for a more intelligent driving future. And TuSimple’s value proposition makes a lot of sense. Still, among autonomous driving stocks, TSP is one of the more speculative plays. As I mentioned before, self-driving vehicles are still very far from mass commercial production and adoption. Most industry experts say we are at least 5 to 10 years away from so-called “Level 5” self-driving, in which the steering wheel is optional. Until the world gets comfortable with the idea of driver-less vehicles, TSP won’t be able to generate meaningful revenue or profits for several years out, if at all.
Given the sheer potential of this market, its no surprise that competition is fierce. Current autonomous driving leaders like Tesla, Baidu (NASDAQ:BIDU) and Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) self-driving unit Waymo pose a huge threat to TuSimple’s position in the autonomous trucking sector.
All of these companies are developing AD systems, including HD (high-definition) mapping, camera recognition, radar and lidar detection. It’s quite conceivable that any of these behemoths could repurpose their technology for trucks. That would put an end to TuSimple’s already narrow competitive moat.
Finally, TuSimple faces potential regulatory hurdles. AD ultimately threatens drivers’ jobs, which could incur backlash from labor unions. The AFL-CIO has already spoken up. The organization says autonomous vehicles place “millions of jobs at risk” and urges that any legislation to speed deployment of self-driving cars should not apply to commercial trucks weighing 10,000 pounds or more. The result: a much smaller addressable market for autonomous trucking.
Battling a steep valuation
While TuSimple’s business model makes sense, TSP’s valuation doesn’t. Despite having generated just $1.8 million in 2020 sales, TSP has garnered a head-scratching $15 billion market cap. Looking closely, that’s an unbelievable valuation of over 900x price-to-trailing-sales. Last time we saw numbers like these, it was the late 90’s (and we know how that ended).
While I love a good growth investing story, there is simply no way to justify these numbers. Just for fun, let’s assume TSP captures 50% of the entire AD truck market, which is expected to be worth roughly $1.7 billion by 2025. Applying a very generous 10x price-to-sales ratio on 2025 sales estimates — still aggressive by any measure — implies a valuation of $8.5 billion for TSP stock. That’s an almost 60% discount to where the stock trades today. While investors may be able to appreciate the value proposition, the stakes are clearly too high.
Without some real revenue growth, this stock is setting up for disappointment. Steer clear for now.
Your comments and feedback are always welcome. Let’s continue the discussion. Email me at jmakris@investorplace.com.
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.
