Silicon Valley usually wins the race to bring new technologies to market. That’s why Northern California is home to many of the world’s youngest billionaires.
Its reputation for turning ideas into products means many investors expect the first driverless cars to come from a Silicon Valley giant. The apparent leader in the field is Alphabet’s Waymo division. Alphabet is the parent company of Google.
But in the race to produce driverless cars, smart investors are looking at Detroit.
A Big Head Start
General Motors Co. (NYSE: GM) already has a driverless car on the road. Few investors realize that. Yet the distance driven by GM cars dwarfs most of the competition, trailing only Waymo.
(Source: Bloomberg)
Cruise began as a startup focused on developing kits to retrofit vehicles with self-driving capabilities. That’s a Silicon Valley idea to change the world. But the focus soon shifted to writing software for fully self-driving vehicles.
The small company caught the eye of GM, which bought Cruise in 2016. Since becoming part of GM, Cruise has been working on software to make its Chevy Bolt electric vehicles fully autonomous.
“Cruise Automation has given GM a big head start, and the acquisition has been great for Cruise as well,” according to Bob Ramseyer, managing partner of Service Lane eAdvisor, a technology and consulting company in the automotive dealership space.
Ramseyer adds that: “Cruise appears to be running autonomously from Detroit and has the benefit of GM capital and manufacturing know-how.”
GM Is Ahead of the Race
Data in the chart above shows the effort is moving quickly, and GM is likely to be a winner.
The truth is that building a driverless car involves building a car. That’s a capital-intensive process. It’s a process prone to problems. Just ask Tesla.
Tesla is building electric cars, inventing processes as it goes. It’s also encountering problems that repeatedly delay delivery.
That’s where GM holds an advantage. The company already knows how to build cars. The company also has factories staffed with skilled employees and supplier relationships in place. All that’s needed is the technology.
In the race to deliver the next-generation vehicle, GM’s infrastructure provides an edge over startup rivals. Its most recent balance sheet shows property, factories and equipment worth more than $79 billion.
Waymo’s parent, Alphabet, could use some of the $120 billion in cash and cash equivalents on its balance sheet to build car plants. But that process will take years.
That means GM is ahead of the race. It’s also likely to hold its lead.
The Bottom Line for Driverless Cars
Investors should look at GM stock as two businesses. One part is a slow-growth auto business. The other part is a fast-growing auto business likely to build the first mass-produced driverless car.
Valuing new technology is always difficult. But GM is undervalued with a price-to-earnings (P/E) ratio of less than 6 based on this year’s expected earnings. Tesla, the automaker/solar power company, is priced at 137 times earnings.
Somewhere between those extremes lies the right price for GM.
Regards,
Michael Carr, CMT
Editor, Peak Velocity Trader