Christian Dehaemer is pitching his Crisis and Opportunity newsletter ($499!) by talking up a “Ghost Town Showdown” that he says indicates we’re on the verge of seeing big profits for the suppliers in the “driverless car” business.
So, naturally, we want to know what these “secret” stocks are — driverless cars have been teased before, of course, and they get a fair amount of press, thanks in part to the high profile projects or rumored projects from Google/Alphabet (GOOG) and Apple (AAPL) and Tesla (TSLA), among others, but it’s still early days yet.
Christian Dehaemer is talking up the potential of the suppliers who will make this autonomous car “revolution” possible, which is also not new or shocking — no one really thinks that Ford or Tesla or VW or anyone else will “own” the autonomous car or be the one big winner, but lots of pundits have opined that there could be some huge winners in the parts, equipment, chip and software supply chain as new advancements are made and adopted… kind of like the improvements in air bags and seatbelts that helped propel some suppliers in past decades.
The race for the automotive chip business has been a pretty widely-covered one, particularly because it was such a big reason for one of the larger recent acquisitions (NXP Semiconductor buying Freescale to become the largest automotive chipmaker by sales), so there are a lot of companies to consider… but we’re still curious to see who Dehaemer is pitching.
So let’s dig into the ad … this is how it starts, in case you want a taste of the hype:
“REVEALED: The Lucrative Truth Behind America’s Mysterious…
“Ghost Town Showdown!
“Michigan, Florida, and Virginia are spending tens of millions creating fake cities… in a battle to win the lure of a fast-growing $2.5 trillion industry
“Here’s how to claim your piece of the trillion-dollar prize BEFORE the mainstream catches wind… for just $6 a share.”
That’s a reference to the fake towns and suburbs, akin to huge movie sets, that have been built or set aside to test autonomous cars… and to the regulatory “light hand” that some states are offering in attempts to make sure that Alphabet and the big carmakers and insurance companies want to establish testing or research projects in their states.
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Not that they necessarily need these “ghost towns,” of course, since driverless cars have been on the road for thousands of miles in California and Nevada (and in other places, but Google’s project that’s focused on CA is the most well-known and well-covered) during the first phase of development… but I guess we’ll always need “test tracks” of some kind… and, perhaps more importantly for Dehaemer’s purposes, the “ghost town” image does probably help to get attention for the newsletter and make the idea of driverless cars seem more “real” for folks who haven’t followed the news in recent years.
Dehaemer goes on to say that “Billionaires are staking their fortunes on this” and that these investments are “set to soar over the next few years whether the public is ready for it or not”… that doesn’t mean, if it’s true, that any one company you can pick today will be a huge winner, of course. One thing I find in almost all teaser ads of this kind is that there are a few missing rungs on the ladder — “this will become a multibillion dollar business” and “this company currently has a growing market share in automotive cameras or chips” does not automatically mean that “this company will get most of that multibillion dollars in the future” … or, even if it does, that the business will be profitable, or will be better than the market currently expects.
The current price of any stock already reflects what the broad market thinks will happen in the short term, so most of the time it’s either the long-term dominance of a company’s products or services (which is hard to predict, especially early on) or short-term market misunderstandings or overreactions by the market that make a stock attractive — to consistently do pretty well you need to not just pick good companies, but pick good companies who are currently (in your opinion, of course — this is all opinion and conjecture until the future happens) underestimated, on average, by the thousands of other investors who are considering the stock each day.
Being a big supplier to a large-scale manufacturer doesn’t mean you automatically get rich — one reason the automotive chip suppliers are all building up scale is that they see the increasing importance of electronics in the auto market (the average car probably has well over 100 computers now, many of them just to process a single task, and relies on over 100 million lines of coding), and they want to be able to offer stronger, more integrated suite of products and services to automakers so they can avoid the punishing margin compression that is part and parcel of life as a semiconductor seller.
So that’s the standard caveat for any semi stock: It’s not easy making money when the one thing that most people know about your business is that the products get twice as good and half as expensive every couple years, and it’s very hard to tell early on whether a chip will get a premium price and cause a company to soar because the big manufacturers need or love your chips (like Apple and Skyworks Solutions) or whether those huge, almost oligopolistic producers will crush you by demanding price cuts because other people can make similar chips to their standards (like Apple and Invensense, to name one of many such examples).
And it’s not necessarily all that much rosier to be an auto supplier all the time even if you’re not on the chip side — most of them are doing pretty well recently, thanks to very high volume auto sales in recent years, but during the auto downturn/bailout six and seven years ago most of the auto suppliers at least flirted with bankruptcy… there’s always risk in having a small number of major customers, and in having to invest to “win” your way into products years before you have any idea whether or not those products will be sold at large enough scale to make you a good profit.
But enough of the caveats and worries… what’s our “make us rich” idea from Dehaemer? And is he good at picking these huge winners?
He hasn’t teased many tech stocks recently, at least not that I’ve covered, and the most recent were probably his robotics picks that are, as of today, pretty meh (though some of them did well for a while, I don’t know when his subscribers might have sold). Dehaemer claims to have handed his readers “massive winners” in the past, and he’s still using his past recommendation of Petro Matad as the prime example of getting 759% gains into the Summer of 2010 — and that’s more or less true, we talked about his tease of that stock when it was in the 20-pence neighborhood and it did eventually peak at something close to 200 pence, but I have no idea whether or not Dehaemer got his readers out before the company collapsed on weak drilling results (his publisher was still pitching it as a huge opportunity near the peak in the Spring of 2011, which doesn’t look so good in retrospect).
So what is he teasing us with today? Here’s a bit more from the ad:
“What I’ve found are THE very best ways for you to make a killing as this revolution shifts into high gear.
“The companies I’m going to tell you about are the ones who supply critical components for making self-driving cars….
“I’ve unearthed a fast-growing $6 company that’s poised to soar because of this earth-shattering mega-trend”
So, keeping in mind that I’ve never yet heard convincingly of a company who sells unique products required by self-driving cars, what are Dehaemer’s picks that he thinks are good enough to entice us to subscribe to Crisis and Opportunity?
Well, the clues are a little thin… but we’ll try to identify them for you. Here’s the first:
“Driverless Car Revolution Winner #1: This tiny company makes the chips that power the software for self-driving technologies. It owns roughly 1,000 patents. It currently trades for $6 a share. But don’t expect it to remain this cheap for long — the market for automotive chips is expected to hit $31 BILLION this year, and there’s no sign of a slowdown in sight.”
There are two major suppliers of automotive chips which have prices at about $6 a share, ST Microelectronics (STM) and Renesas (RNECF OTC in the US, or RNECY for the 1:2 ADR — home exchange is Japan, ticker 6723). Neither is “fast growing” according to any conventional definition of that term, and both have way, way more than 1,000 patents… but Renesas was the largest automotive chip supplier before the NXP/Freescale merger (and may still be, the jury’s out), and STM is often written about as having about 1,000 patents in just the MEMS chip business, so you could probably squeeze either into those hints if you really wanted to.
My best guess on those clues is STMicro, which isn’t a great match. STM has paid a decent dividend but been a value trap for years — always looking like it’s on the verge of fixing itself and turning its massive size into an actual profit generator, but never actually getting over the hump and making money for shareholders. Even with the falling Euro, which might provide a small advantage, on balance, it has disappointed again and again — analysts have continually cut estimates, and now they think STM will start growing earnings next year.
That’s too similar to past rose-colored prognostications I’ve seen about STM over the past three or four years — their strong position in sensors and MEMS chips and, indeed, in automotive should mean they can grow… but that’s been true since before the financial crisis and it hasn’t worked. But maybe you could get away with calling them “fast growing” given the weak comparisons in the past couple years, when they often lost money… and analysts have apparently put them down for 49% annual earnings growth over the next five years. Sure, they should be lined up to benefit from the internet of things and autonomous cars and more mobile everything, but they’ve been “supposed to be” about to catch that cutting edge for years, and the market cap has dwindled from near $20 billion to less than $6 billion. I guess it will be easier to grow from this depressed level now, but color me skeptical.
Renesas has also lagged for a while but is a bit more appealing, at least to me — partly because it’s going through a shakeup and has been talked about as a takeover target (or an acquirer) thanks to its longstanding big market share in automotive chips. I am not an expert in the nuances of each chip designer’s strengths and weaknesses, but I think it would be surprising if automakers moved away from their longstanding tendency to have tight, long-term relationships with their core suppliers… it’s not likely to be some upstart little company with a new chip that gets built into cars to enable more autonomous driving, it’s much more likely that it will be the big, trusted and tested suppliers like Infineon, NXPI/Freescale, Renesa, et als (there are lots of such chips in cars already, of course, it’s just that they’re getting more capable with each generation and iteration).
But, like I said, neither of these is “fast growing” right now, despite rapid growth in some of their segments… and neither is all that small. Could it be someone else? Sure. Lattice Semiconductor (LSCC) is a possibility, more because of car infotainment than other automotive segments… No one else popped out of the Thinkolator as a likely candidate, or comes to mind for me, but there may well be a better, smaller, faster-growing chipmaker with potential in the autonomous car market that I haven’t come across.
So in the absence of a better match for #1, let’s move on to…
“Driverless Car Revolution Winner #2: This company develops radars, forward-looking cameras, and night vision cameras for driverless cars that can detect upcoming obstacles. It recently landed a contract with Volvo to build advanced safety systems for its line of driverless vehicles. In the next three years, the company expects to reach an eye-popping $15 billion in sales. At that explosive rate, I believe this fast-growing firm could easily double your money or more.”
That’s a bit of a stretch — if the Thinkolator is thinkifying about the right stock, the company has at least inferred that they think the market for autonomous cars could reach $15 billion (from what I can tell, this number assumes growing from roughly 70 million to 100 million cars sold per year worldwide X $150 average per car for “autonomous” features and sensors — though that seems low, maybe those are just the sensors MBLY might have some hand in), and asserts that they will have some sort of huge market share at that point.
That’s MobilEye (MBLY), which is a match largely because of that squishy $15 billion figure, the fact that they do focus on forward-looking camera technology (and are working to provide radar/lidar and night vision technology as well), and the fact that they are indeed very fast-growing.
They’ve also been a lightning rod for criticism and a target of both momentum jockeys and short sellers during their young life as a public company (their technology is based on 15+ years of work, mostly on machine interpretation of single-camera video signals — using video instead of lidar or radar to monitor distance and objects, and to see the lines on the road – but the company just went public in 2014), including a very negative report by Citron a few months ago, mostly because any justification for their $8 billion market cap has to be built on pretty remarkable sales growth.
They’ve been growing fast, but the valuation is ludicrous based on any kind of near-term assessment — there are a couple earnings estimates up for 2018, and while estimating earnings for 2018 probably involves tea leaves, magic, and reading squirrel entrails, lets take them at their face value and assume those estimates of about $1.60 in earnings per share would mean a revenue number of about $1 billion. If you think that’s likely (that would be about 400% sales growth over three years), today you’d be paying about 20X 2018 earnings and 8X 2018 sales for the stock. That’s reasonable, perhaps, IF they can really grow at that rate into 2018 and for at least several years beyond, but it’s a lot for a chipmaker or an automotive supplier — not many reach a large-cap valuation that rich, either because they’re bought along the way by a bigger player or because business lines that lucrative attract lots of competition and the blue sky promises fail to come true (Renesas, which still likely has a small lead over NXPI/Freescale in auto chip sales and is closer to being an auto “pure play” than most leading suppliers with something like half their revenue from automobiles, has a market cap of only $10 billion and trades for 1.7X current sales, NXPI has a $30 billion market cap and trades for 3X current sales).
Incidentally, other numbers I’ve seen that are more directly applicable to most of these tech names point to a total of $3 billion for the “automatic driver assist systems” chip market in 2020, or “microcontroller and processor units for autonomous vehicles will be a half-billion-dollar market by 2020” (both guesses from IHS). That’s not the same as the whole “autonomous car” market, which will include more than just silicon and presumably include other sensors or hardware and software, but it seems more measured to me. It’s really hard to know what pricing will be like — right now, we’re in the process of seeing the most expensive components of real autonomous car capability, like LIDAR sensors (the huge versions of which are spinning on top of Google’s autonomous cars), come down in price from tens of thousands of dollars to $100 or $200 thanks to the push from both big suppliers and startups like Quanergy (which is still venture-funded). Cost pressure to move new technologies from concept cars and testing to mass production is huge, even for high-end luxury cars but especially for mass market cars.
“Driverless Car Revolution Winner #3: This is one of the largest electronic manufacturing firms in the world. It helped Google manufacture and bring to market the Chromecast, its popular digital media playing device. Now it’s helping Ford develop its line of driverless cars. Its technology helps cars ‘speak’ to one another on the road. It boasts a diverse customer base including household names like Google, Cisco, Microsoft, Lenovo, Ford, Xerox, and more. All told, it has its hand in 12 different industries, generating over $1 BILLION in revenue from each of them. It’s no wonder analysts have referred to this company as the ‘cash flow king.’ And right now, you can buy shares of this little-known firm for just $11.”
Thats Flextronics (FLEX), the global contract manufacturer which did indeed help Google develop the Chromecast. They’ve also developed and manufactured at least some of the SYNC dashboard infotainment systems for Ford, they do work with almost anyone who needs any kind of electronic device manufactured, revenue over the last twelve months was almost $25 billion, but both revenues and net income have been pretty stagnant over the past five years.
This is a great cash flowing machine, despite the fact that the profit margin is so low (generally 1-2%), and they’ve used much of their cash to buy back shares, shrinking the share base by about 20% since 2011, so they have been able to make the earnings per share performance look a bit better… but still, the last two quarters brought earnings that were lower than the year-ago quarter, so you can see why the stock is trading at a fairly low valuation of 12X trailing earnings, 10X trailing free cash flow, and roughly 10X expected 2016 calendar year earnings (they use a different fiscal year, so I’m fudging a bit — their 2016 fiscal year ends in March).
Analysts have a bit of optimism about FLEX, I don’t know if that’s because of something the company is doing to improve margins, or just because they like the continued buyback potential or see more customers coming FLEX’s way — they may have a good year, particularly if it looks like they can really earn $1.20 in fiscal 2017 as analysts are anticipating (and keep growing at double digits, which they haven’t done for a really long time), but I don’t imagine that driverless car systems are going to be the pivotal factor for their success over the next few years.
There are a lot of automotive suppliers and automotive chipmakers, even after several little guys have been bought over the last couple of years as big players like Qualcomm (QCOM) and Intel (INTC) are trying to nudge their way into that market. Freescale and NXP are the new titan in town, following their merger, and the other big ones include Renesas, Infineon, STMicroelectronics, ON Semiconductor (ON), and other big players like Texas Instruments (TXN) and Toshiba and Micron (MU) who have substantial automotive businesses… but where, as with Qualcomm and Intel, the automotive chip business probably isn’t big enough to be a major driver (pun intended!) of earnings.
My first thought about the new wave of automotive electronics is that although we may see short, sharp victories for small cap stocks in this segment if they get meaningful design wins, most of this is likely to be evolutionary, not revolutionary. We’re moving from cruise control to parallel parking assistance to lane-change assistance and steering control for “hands free” driving on well-marked highways and slow speed “gridlock” space maintenance between cars, and from there we’ll keep moving toward cars that follow a mapped route and avoid pedestrians better and talk to each other and receive signals from police and street “signs”, but there’s not one single chip design or patent that gets us there and makes us rich… it’s evolution of technology and (very importantly) regulation and recognized standards, and “survival of the fittest” in that kind of highly regulated environment often means “big guys win.” The consensus seems to be that we’ll have some sort of hands free “autonomous” driving available on highways by 2020, presumably starting with a few high-end vehicles, and that it will continue to improve and trickle down the fleet for the ensuing decade or so.
The auto makers and tier 1 suppliers are investing billions into autonomous cars, and are even taking over the Consumer Electronics Show of late (including Nvidia, which we’ve covered as a driverless car idea from the Fool in the past and which I own LEAP options on personally), and the choices the automakers and big suppliers make over the next few years will have a significant impact on the chip and tech suppliers whose technology goes into the parts built by those tier 1 suppliers, but there are — if you’ll pardon another pun — a lot of moving parts here. You need a good dose of chaos theory to guess at who the winner might be by 2020 when more of these advanced technologies might reach scale, but it might also be that the power of the car electronics/driver assist trend is enough to lift many, if not most, of the major players as we move through this latest transportation evolution.
And it doesn’t hurt that last year was the best year for car sales in the US since the mid-1990s — that rising tide has made a lot of auto suppliers much healthier in recent years, and the autonomous car is certainly igniting some competition among them, a raft of new startups that we’ll probably see going public over the next couple years, and it has clearly fired up some interest from investors (all of whom, I’m sure, are hoping that this isn’t the peak for car sales for another 15 years, and that the Chinese don’t stop buying cars — it’s a cyclical business, if car sales go down markedly again pretty much all “pure play” auto suppliers will probably be lousy investments).
Whether it will be Renesas, STMicro, NXP Semiconductors, Flextronics, Mobileye, Alphabet, Apple (AAPL), Ford, GM, Tesla, Toyota, Nvidia (NVDA) or others who end up the best “driverless car” performers in the stock market is a pretty open question — I don’t have a strong feeling for it at the moment, but am happy owning Alphabet and speculating a bit on Nvidia, and my knee-jerk reaction would be to hope for a bit more weakness in NXPI and see if that one gets too cheap to ignore, but that’s about as far as I’ve gotten on the autonomous car stocks — and that’s all I can discern about Dehaemer’s picks from the clues provided, so if you’ve got an opinion on any of ’em feel free to throw it on the pile.
Disclaimer: as noted above, I do own shares of Alphabet (GOOG) and 2018 LEAP call options on NVDA, and I own shares of Apple (AAPL). I won’t trade those or any other stock mentioned above for at least three days