Last month, Autonomous Vehicles fell into the “trough of disillusionment,” which is the downward slope that analyst firm Gartner publishes to show the hype cycle for certain technologies. You can think of this as “winter is coming” for tech products – a time when all of the buzz and excitement finally meets reality (note: artificial intelligence winter is a well-documented thing). The reality for autonomous vehicles includes regulations, production cycles, and delays in implementation for what is an extraordinarily difficult problem to solve – how to get machines to respond like humans at crucial moments. This gap between investor expectations (perception) and commercial deployments (reality) has created an autonomous vehicle bubble that will pop in 2019 as the next level of autonomy continues to face delays.
Brief Background on the 6 Levels of Autonomy
You can skip this section if you know the six levels of autonomous vehicles as published by SAE International. If not, this background is important to understand why the autonomous vehicle bubble occurred, and when it will burst.
Level 0: No Automation. The driver performs all of the tasks.
Level 1: Driver Assistance. The driver handles all of the accelerating, braking, and monitoring of surrounding environment. An example of this level is when a car brakes for you in a critical moment.
Level 2: Partial Automation. The vehicle assists with steering and acceleration functions and allows the driver to disengage. Bubble forms here with investments pouring in, fueled by high hopes of Level 4 or Level 5 commercial deployment by 2020.
Level 3: Conditional Automation. The vehicle controls all monitoring of the environment using sensors. The driver’s attention is critical but the AV system runs the safety critical functions. This level does not require human attention under 37 miles per hour. Bubble bursts at this level as commercial deployments are delayed and reality sets in that AV investments will not see returns for many years.
Level 4: High Automation. Vehicle is capable of steering, braking, and accelerating, as well as responding to events and changing lanes. The system is switched into the mode under safe conditions, but the vehicle cannot determine dynamic instances like traffic jams or merging onto the highway. Most likely ETA 7-10 years.
Level 5: Complete Automation. No human attention required. No need for pedals, brakes, or a steering wheel. The AV controls all critical tasks, monitoring of the environment and identification of unique driving conditions like traffic jams. Most likely ETA 10-15 years.
Volatility is Closer than it Appears
Waymo has been in testing since 2009 and has racked up more than 8 million miles on public roads and more than 5 billion miles in simulation. There are 600 self-driving Chrysler Pacifica Hybrid minivans on the road with goals of launching a commercial driverless transportation system later this year. This, and many other “near deployment” announcements have created massive expectations for the AV market, which is forecast to grow 10x from $54 billion in 2019 to $556 billion in 2026 at a growth rate of 39.47%. For investors, the primary risk today is that these forecasts assume commercial deployments will occur on time.
As Mike Ramsey, a lead author on the Gartner report points out, even if Waymo and General Motors continue to debut driverless minivans or launch ride-hailing fleets, commercial deployments won’t be ready anytime soon. For example, the 2019 Audi A8 with Traffic Jam Assist with Level 3 partial automation, which has been anticipated for some time, has extended its release date another year due to foggy federal regulatory framework, infrastructural differences, and a lack of consumer understanding of self-driving technology.
The regulation hurdles between Level 2 and Level 3 and delayed deployments will put immense pressure on stocks that are overvalued based on AV speculation. ABI Research, an advisory firm that reports on market-foresight trends, predicts 8 million consumer vehicles with Level 3 to Level 5 autonomy will ship in 2025. Compare this to the 94.5 million vehicles sold in 2017 which equates to 8.5% of sales. This is a small and fairly insignificant percentage of market share to be chasing 7-years ahead of deployment. Yet, investors are pouring cash into hyped up stocks- and the press plays a large role in this. Headlines are a continual churn of autonomous vehicle “moments” – every partnership, every mile driven, every make and model that adds another feature. To be clear, we’ve only gone from a Level 1 to Level 2. We are not able to release Level 3 AV right now – and yes, that includes Elon (most especially Elon – read my Tesla analysis here).
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One example of this investment bubble is when Tesla’s stock skyrocketed in 2016 while Adam Jonas from Morgan Stanley, a lead underwriter, said that Tesla’s ridesharing network was worth $244 a share. However, reality has set in, and Adam Jonas has now changed that valuation to $95 per share or $17 billion by 2040. The following year, Tesla went on to surpass BMW’s market cap of $60 billion in 2017 despite posting a loss of $725 million from 80,000 vehicles compared to BMW making $7.7 billion from 2.4 million vehicles. Meanwhile, the 2017 deadline for a full rollout for self-driving has come and gone. And as recently as this month, Tesla officially stopped promoting the “Full Self-Driving” option for its cars.
Another example is GM, whose shares have dipped more than the broader markets, erasing any gains from its peak in October of 2017. The hurricane sales from last September helped the stock, which rose 11.9% from the previous years, however the stock has retraced and is now trading at $31-$32 per share. GM is no stranger to pushing the autonomous vehicle hype with executives commenting that Cruise Automation was making “rapid progress” back in October 2017, and in a blog post, the CEO stated, “in the coming months, we’ll take the next bold steps in testing our autonomous technology as we lead the way to fully self-driving vehicles without any human driver as a backup.” Those months have come and gone, of course.
Research studies have proven that consumers are very confused by the high profile promises, which Thatcham Research calls “dangerously confusing.” In a recent study, 71 percent of respondents around the world believe they can buy an autonomous vehicle today – yet there is not one autonomous vehicle on the market. The top three brands that consumers mistakenly believe distribute self-driving cars include Tesla (40%), BMW (27%), and Audi (21%). Of these, 11 percent say they would take a brief nap while using assist systems. Therefore, the disconnect between perception and reality is widespread – and not only in the investment community.
Startups will do their part in the autonomous vehicle bubble, as well. Zoox, Inc is a startup that has raised $800 million with a $3.2 billion valuation — but has not made any revenue yet. The premise of Zoox is to forego partnering with auto manufacturers by deploying their own vehicles. Essentially, the idea is to skip the AV iteration and deployment line and go directly to Level 4 or Level 5 autonomy with no prior manufacturing experience – all by 2020. Meanwhile, there is no mention of regulations, safety and security hurdles in the deployment estimate, or anything else related to practicality for that matter. And as Bloomberg reported, “Even with all of that cash, Zoox will be lucky to make it to 2020, when it expects to put its first vehicles on the road – ‘It’s a huge bet,’ [the founder] concedes.”
A note on Nvidia and Intel
I’m working on a separate analysis of these two companies. Follow me for updates.
Nvidia and Intel are in a well-publicized arms race to capture the autonomous vehicle market. With the ongoing PR focusing on AV, one could almost forget that Nvidia gets its revenue from gaming first and foremost, with data centers as the second driver of revenue. In fact, Nvidia’s revenue breakdown in order is: primarily gaming (4x all other revenue), data centers, professional visualization, OEM and IP, and then in last place, auto.
On a side note, gaming is a formidable industry worth $160 billion to $180 billion (this is 3x the size of the OTT market, for instance) – which is one reason Nvidia should stabilize in the short term. Nvidia is also set to capture data centers by providing chips for the GPU cloud, which powers machine learning and artificial intelligence. You can see this growth in the chart above as data center revenue has begun a nice upward trajectory. In other words, one reason I recommend Nvidia in the long-term precisely because they are not dependent on autonomous vehicles for future growth. When the autonomous vehicle revolution finally gets here, it’ll be a nice bonus to their already strong profit margins.
Intel on the other hand is dependent on the data center revenue that Nvidia is slowly chipping away at (apologies for the pun). Intel will have to prove it can compete with the GPU-processing power of the market leader in virtually every forward-thinking segment.
Note: In the short term, both of these stocks currently face potential volatility due to trade war issues with China.
Predictions at current prices:
Sell: Tesla, GM and Intel
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