The newest ad for Whitney Tilson’s Empire Stock Investor ($49, renews at $199) is all about this “Taas” business, and I’ve gotten a few questions since it started circulating a week or two ago… so let’s dig in!
The basic idea is that “TaaS,” which is “Transportation as a Service,” is going to take off and be the next great defining economic trend… which will save lives and money and, if you buy the right stocks, make you rich.
That’s based on two different trends that Whitney Tilson talks up in the ad — electric vehicles, and autonomous driving.
Here’s how he argues that electric vehicles will become mainstream much more rapidly than you’re guessing…
“If you have the choice to get essentially the same car, but one is cheaper to buy, costs 90% less to maintain and use on a daily basis, and lasts up to five-times longer… which car will you buy?
“In just a few years, no one in his right mind is going to buy a new gas-powered vehicle.
“What so many people are missing right now is that this shift to EVs isn’t about the environment or ‘going green.’
“Again, it’s all about economics….
“Mark my words: In five years, electric vehicles will account for more than half and perhaps much more of all new cars sold in the United States.”
But that’s just half of the promised revolution that Tilson sees coming…
“When you pair EVs with another disruptive technology — self-driving vehicles, controlled by very powerful computers — it will be completely transformative.
“Sooner than most people think, you’ll be able to hail an electric, self-driving vehicle via an app on your phone, just like you hail Lyft and Uber ride today.
“And this is TaaS… which stands for: ‘Transportation as a Service’ ….
“Estimates are that TaaS will reduce the total costs of transportation by 10-times, compared to owning your own vehicle.
“TaaS could soon drive down our costs of transportation to just 10 cents or even less per mile!
“Today, it costs about 80 cents per mile in our gas-powered cars, according to AAA.
“Think about that…
“I could soon walk out of my Manhattan home and comfortably ride to the Nation’s capital, in a TaaS vehicle, for less than $25—or even less if I’m willing to share the car!”
And that’s where that “put $5,600 back in your pocket” talk comes from…
“… instead of paying $50,000 for a new car… plus $3,000 a year to fill up your tank… and $1,000 to $4,000 a year for insurance, you’ll instead spend something like $150 a month for unlimited rides with a TaaS subscription.”
That will lead to far fewer car crashes, since we won’t be dealing with human error or road rage anymore… though I guess we have to keep the “law of unintended consequences” in mind when trying to imagine what a few computer glitches could do to the New Jersey Turnpike on a rainy Friday evening.
And Tilson goes on to say that 2020 is the year of “peak car ownership,” with the danger and waste of individual car ownership gradually becoming a thing of the past from here….
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“With TaaS, there will be a HUGE reduction in the number of cars on the road… some say the number of cars we’ll need will drop by 80%.
“Many auto makers will go out of business as a result.
“Over the next few years, you do NOT want to own traditional, indebted car companies like GM.
“You also do NOT want to own most publicly traded car dealerships… or car lenders like Santander and Consumer USA. Nor do you want to own companies that sell personal car insurance like Progressive or Allstate. Or focus on repairing or servicing them, like AutoZone, Midas, or Precision Auto Care.”
A few readers made that point earlier this week when I was talking about an AutoZone teaser, by the way — from a different Stansberry teaser, by the way, so at least we know those editors all have independent ideas, they’re not all singing the same song. And since he mentioned auto insurers but left out GEICO, owned by Berkshire Hathaway, which is the stock Whitney Tilson likes above all others and calls his “#1 Retirement Stock,” I should note that Tilson did try to ask about GEICO and autonomous cars at the last Berkshire meeting, for what it’s worth, but didn’t get his chance last year.
And in case you want to daydream about the other longer-term impacts, here’s more from the ad…
“Imagine a world in which nearly all of the parking lots located on prime land can be converted into new offices, housing, businesses, parks and playgrounds, and other useful spaces.
“Did you know, for example, that approximately 1/3rd of the land some cities is occupied by parking lots?
“According to one estimate, all of the parking space in Los Angeles alone is equal to three cities the size of San Francisco….
“This is going to have the biggest impact of all on one huge industry: Oil.
“The entire industry, starting with the high-cost producers, like Canada’s oil sands, is going to get crushed.
“Oil won’t go away entirely of course, but demand will fall significantly. The long-term price of oil could get cut in half to around $25 a barrel.”
I could be snarky and say that we’re past that already, with oil recently dropping below $20 a barrel… but that’s for May 2020 delivery, when you’re talking about long-term futures the prices are still substantially higher, oil for June 2022 delivery will still cost you about $38 a barrel right now, and if you go out seven or eight years (where futures aren’t really traded much) the futures quotes are for roughly $50 a barrel, so $25 could theoretically be a “cut in half” price.
That’s just a little taste of the massive disruption that this could cause, of course, he goes into stuff like real estate values, and city, state or town budgets that are dependent on parking fees, tickets or gas taxes. And he says it’s coming soon…
“People always overestimate how long a revolutionary breakthrough like this will take to reach massive scale, and that’s the big mistake many are making today too….
“Back in 1985, for example, AT&T hired McKinsey, the world’s leading consulting firm, to predict the adoption rate of cellphones.
“McKinsey’s ‘experts’ predicted the cell phone market would total 900,000 customers by the year 2000.
“But they were off by more than 100-fold… the actual number turned out to be 109 million!
“You see this again and again… every time a truly disruptive innovation enters the marketplace—nearly everyone underestimates how quickly it will catch on and disrupt the status quo.”
And then he starts to get into the individual stocks he thinks you should buy because of this trend…
“If you want to see one simple stat that sums up how quickly this technology is improving… and how fast it’s moving, check this out.
“Waymo announced recently that it took 10 years to reach 10 million miles of autonomous cars on public roads…
“But the next 10 million miles took just a single year….
“Investment #1: Buy Waymo.”
That’s our “freebie” pick that he actually names in the presentation. Here’s a little of what he says about it:
“Waymo is owned by Google (known now as Alphabet), and they are the clear leaders in this space.
“Waymo has driven more autonomous miles than anyone else in the real world—more than 20 million miles as of today….
“Morgan Stanley values Waymo at more than $100 billion. Eventually, we think it will be spun out of Alphabet (the parent company of Google) and become its own company.
“What makes this such a great investment is that you can buy Alphabet today—which is a great, cash-gushing business—and pay essentially nothing for Waymo….
“The stock symbol is GOOGL, and I recommend you do not pay more than $1,600 per share.”
Hard to argue with that, Alphabet is my second-largest investment and I came up with a max. valuation of $1,650 before the coronavirus hit, so I guess Whitney and I are somewhat in agreement there. It’s actually the stock I’ve held the longest in my Real Money Portfolio (about 15 years now), and I’ve even been adding to it this year for the first time in a long time. I think they’re very well situated, though it’s also true that the downturn in ad revenue this year will have a much bigger impact on Alphabet’s results than their still-money-losing Waymo business… and the downturn could be worse than expected for Google’s ad business, since some decimated sectors, especially travel, are huge sources of both search traffic and ad revenue.
Those estimates for the value of Waymo used to be even more aggressive, for a while some analyst had a $200 billion valuation on that business — and it might be that Morgan Stanley’s $100 billion is still pretty high, but you never know, they still don’t tell us very much about the financials or their longer-term plans for Waymo. I’m pretty confident in Alphabet’s future if Waymo is only worth $20 billion, too, so I don’t mind waiting to see how it plays out.
So now, given the freebie, what are our “secret” stocks to seek out?
“Investment #2: Own the Most Important Technology in the Electric Car Space
“The best thing you can do as an investor is position yourself in front of a massive, inevitable, and booming trend….
“Like the boom that took place with smartphones beginning in 2007, EVs are already a superior technology with rapidly declining prices. As a bonus, they are also being mandated by governments around the world….
“Luckily for you and me, there’s a very simple and easy way to do that with one simple investment.
“It lets you own the best electric car technology… and the components EVERY electric car needs.
“It’s THE PERFECT way to invest in the booming future for electric cars. This investment is up 40% since last summer. It’s up more than 75% since the start of 2016… and I expect it to absolutely soar in value in the years to come.”
This is not a 100% certain match, since those clues aren’t all that specific… but this could be Aptiv (APTV), the remnant of the original Delphi auto parts supply company that started life as part of GM decades ago. This part of the surviving company focuses on auto electrification, cockpit electronics, and autonomous driving technologies. The other possibilities that match with some reasonableness are the leading semiconductor provider in the automotive market, NXP Semiconductors (NXPI), and the various electric drivetrain providers among the auto supplier firms, though none of those are “pure play” electric (or even very close). Probably the closest of that latter group, considering the near match on the stock chart clues, is Dana (DAN), but I’d say the best match is NXPI if it’s not APTV.
I owned Aptiv from 2017 to 2018 before being stopped out with a modest gain, and it is a good play on the increasing complexity and electrification of vehicles… though the risk is also that it’s still a broad-based automotive supplier at heart, so to a large degree it’s still a play on the volume of vehicles sold. Much of their profit still comes from selling electronic components in all kinds of vehicles, and vehicle production was already in a decline last year, partly thanks to the GM strike, and will be massively impacted through the coronavirus shutdown this year.
The shares are up about 75% from where they were at their trough in early 2016, and up about 40% since late last Spring… or at least they were a few weeks ago, when Tilson probably put this data and the heart of this presentation together, before the coronavirus plunge. Now, like everything else, it’s a bit cheaper in the high $50s (it was near $100 when the year turned, and could have been around $80 if Tilson’s ad was created in February).
Delphi Technologies (DLPH), the other part of the original Delphi that was spun out of Aptiv a couple years ago, is arguably more of a direct play on vehicle electrification, since they make drive trains… but the transition won’t necessarily be easy for them, because they also make a lot of powertrain parts for conventional cars. Aptiv is more of a bet on cockpit electronics and automotive “brains” than on the electric power train itself, though that’s probably splitting hairs. You could also go with Dana (DAN), another automotive supplier which has moved pretty big into electric drivetrains — Delphi doesn’t match those 40% and 75% price references, but Dana could, and they’d certainly like to be known for their “e-mobility” solutions.
Aptiv’s two big divisions are Signal & Power Solutions, which is their largest and highest-margin business and is benefitting from big investments in higher voltage electronics, and Advanced Safety & User Experience, which includes the self-driving car technologies they’ve built and bought over the years. Their guidance was for a weak first quarter but for overall revenue growth of 4-7% for the year, with earnings per share growing by a couple percent, and they did see strong secular growth in power electronics and in safety technologies at the time that they were releasing their last quarterly update, but they’ve since withdrawn their guidance and that has all been thrown out the window for 2020 at this point, since nobody’s making cars now and few are buying them.
A few analysts have issued updated coverage of Aptiv in the past couple weeks, with a little optimism and some price targets that sound appealing after the fall, with Citigroup calling it a “buy” with a $67 target and Goldman Sachs going to $70 just yesterday, but of course that’s not much solace for those who bought at $90 in January. It’s an odd world when analysts are slashing their target prices by 30% but also giving the stock an “overweight” rating, but I guess you have to make decisions with the price you have in front of you today, not the price of a month or three months ago.
So, like a lot of other companies, Aptiv has now withdrawn its guidance, drawn down its line of credit to make sure they have some financial flexibility, and halted its dividend… which means that they don’t know what’s going to happen this year, and neither do we. This is in part a technology company, but it’s also a big auto parts supplier with factories and huge capital expenses and lots of obligations, so a lot will depend on how long it takes for the big global carmakers to get back to work, with European automakers in particularly being very important for Aptiv, and what the overall restoration of demand looks like — if plants are closed for a couple months and auto sales are down to zero for three or four months, they can probably survive that… if the weakness persists for a lot longer than that, their debt burden will start to be more challenging and the numbers start to look pretty bad.
I do like Aptiv, it’s the part of the auto business I’d want to be in if I were forced to be investing in the auto business… and we might be seeing a bottom-fishing opportunity if things bounce back relatively well from here and Wall Street starts to really focus on a rosier future in 2021, as Whitney seems to expect (he’s been generally pretty optimistic in all his free commentaries)… but I’m also kind of glad that I don’t have to invest in the auto business right now. Aptiv is expecting to host a virtual annual meeting next week, and the first quarter report should come out a week or so after that.
And if it’s one of the others, I’m not so crazy about Dana (DAN), given the very pure exposure to “how many autos are getting sold right now”… and NXP Semiconductor (NXPI) has been a challenge to assess over the past few years because of the tug of war over what’s most important to them — they lead in NFC chips that let your iPhone pay the register at Whole Foods without you pulling out your virus-soaked cash, so growth is sometimes good and there is a bit of sexiness in the business, but they also are very reliant on the auto sector as new cars incorporate more and more semiconductors, which means falling auto sales are a problem. NXPI has been a very “average” semiconductor company, trading pretty much exactly in line with the Philadelphia Semiconductor index over the past few years (I’m using the SOXX ETF for my comparison), and like most chip stocks, particularly those tied to industry, like Texas Instruments (TI), it will probably ride the economic cycle hard — so if we have a prolonged recession it should do worse than most stocks, and if a surge of economic growth comes back, it will probably help lead that growth. Still, NXPI at least has other businesses if automotive demand falls apart for a couple years… Aptiv and Dana, not so much.
And what’s next?
“Investment #3: Own the Two Key Technologies for Autonomous Vehicles
“Driverless vehicles are becoming a reality today because of a dramatic confluence of many technologies: computing power, cameras, sensors, laser range finders (called LIDAR), GPS, and artificial intelligence software, just to name a few.
“But my team and I believe there are two companies responsible for by far the most ‘critical components’ for the best self-driving cars.”
Ah, OK, so “Idea number three” is actually two different ideas. Way to make the Gumshoe work a little harder, Mr. Tilson!
“The first company makes the most technologically advanced ‘brain’ and ‘nervous system’ for autonomous vehicles. This firm has already partnered with many of the leading companies in this space, including BMW, Hyundai, Audi, Intel, and Lyft, just to name a few.
“This technology helped complete the longest automated drive ever… from San Francisco to New York City… and was selected by one national government to be the technology behind a country’s autonomous taxi’s set to hit the road in 2022.”
Actually, that is a perfect match with Aptiv (APTV)… so maybe I was stretching a bit too much to guess Aptiv for the previous tease. Aptiv, which at the time was still called Delphi, did provide much of the brains and sensors and operating system that powered an Audi Q5 on what they called the first autonomous coast-to-coast trip about five years ago, and they are partnered with all of those other companies.
And yes, they were also selected as the “strategic partner” to implement the “mobility on demand” service by a national government, with the goal of commercialization and implementation by 2022, though that selection — by Singapore — was in 2016, and I don’t know what the current status of the project is. So I guess we’ll have to revert to NXPI as a guess for the first one, though it’s an imperfect guess… if you’ve a better one, feel free to throw it on the pile for our consideration. Or maybe Tilson’s “double dipping” with Aptiv, who knows.
And one more!
“The other key technology you want to own in the driverless technology space is the company that provides the computing power for many of today’s driverless vehicles.
“This is critical for EVERY autonomous vehicle.
“Already, this company has partnered with many of the world’s leading vehicle manufacturers, like Toyota, Volkswagen, Mercedes, and Volvo…
“Plus trucking companies like Peterbilt and Kenworth…
“Auto parts makers like Bosch and Continental…
“Tech firms like Sony and Panasonic…
“And research institutions like Berkeley, Carnegie Mellon, MIT, and Stanford.”
That one, sez the Thinkolator, must be good ol’ NVIDIA (NVDA). NVIDIA has been a big part of the autonomous car “brain” story for half a dozen years now, the first pitch on that I saw was from David Gardner at the Motley Fool back in 2014 (he touted NVDA because it was “Warren Buffett’s Worst Nightmare” — not because it was a pricey tech stock, but because self-driving cars would spell the end for auto insurer GEICO, one of Berkshire’s cash gushing companies), and pretty much every tech-focused newsletter pundit has recommended the shares at some point over the past five years, whether for their self-driving AI systems or their gaming chips or virtual reality processing power or blockchain mining prowess or whatever else. But their first real foray out of serving up faster and faster GPUs for “hardcore video gamers,” at least in the minds of investors, was in the self-driving car space.
And yes, NVIDIA is partnered with all of those companies and tech centers (though Peterbilt and Kenworth are the same company, those are two different brands owned by PACCAR), and clearly has a lead in the heavy data processing work that will be required for autonomous vehicles — for high-level autonomous driving to work in the real world, every car has to effectively have a supercomputer on board to process all the variables and all the inputs from dozens of cameras and lidar or other sensors, and do so extremely quickly. That may not be the story ten years from now, it might be that 5G networks are advanced enough to allow communications that are fast enough for a lot of this processing to take place in a data center instead of in a supercomputer in the trunk, but for now every car needs a really fast processor to help it “think,” and NVDA has arguably been focusing on that longer than anyone. They aren’t the only ones, there are other high-end processors out there, including from their archrival AMD (AMD), and some companies have very publicly gone their own way to develop their own processors (like Tesla, which started with NVDA and then decided it could do it solo), but NVDA is still the big name here.
Of course, it has also bounced back REALLY fast from the crash, mostly, I gather, because folks are expecting data center demand and gaming GPU demand to remain strong during these “stay at home” days. I’d have a hard time chasing this one at $300, since I also found that price a little steep back when I looked at their first quarter results before the crash, but give it a 20% dip from here and it gets pretty appealing for a nibble. Here’s what I wrote about NVIDIA for the Irregulars back when they reported in mid-February:
2/14: NVIDIA (NVDA) seems to have gotten past the disaster of last year, with a couple quarters in a row now of sequential growth and, just last night, their first reported quarter of actual year over year earnings growth in a little over a year. I still think this is a “buy the dips” story if you’re looking for shorter-term opportunities, but I also hold on to a core position because I think NVDA is still likely to be the basic operating system underlying most major machine learning projects — being first with high end inferencing chips and getting their products used by most of the major AI engineers a couple years ago gives them a large head start. The challenge is in buying after one “vast improvement” quarter following a year of weakness, because it’s hard to have confidence in the projections that they will be able to increase revenue again on a steady basis (revenue had almost doubled in 2-3 years before the peak in mid-2018, but fell by 25% over the past year or so before the bounceback this quarter)
The stock soared to new highs on the strength of their earnings report and conference call last night, but I would be wary about chasing it here — they did say that they’re cutting their revenue forecast by $100 million because of likely weakness in gaming chip sales in China (gaming chips are still its largest segment, and China its second largest market), but strength in data center sales is presumably enough to make up for that — they talked up the strength of their AI chip sales into data centers, which was a bright spot in a quarter that was rough for some data center vendors (like Arista and Cisco), but also strong for NVIDIA’s core competitors AMD and Intel. That data center business for NVDA was the real reason they “beat” the earnings estimates, sales grew 43% in that segment thanks to strong buying from the “hyperscale” customers (which usually means Amazon, Google, Facebook and Microsoft, though they called out Microsoft, Twitter and PayPal in the conference call).
The big bright spot for me is that although gaming is still their largest segment, it has shrunk in importance because of the huge strength in data center sales — gaming chips in the quarter brought in sales of $1.5 billion, and data center chips rose to $968 million. That’s a huge swing over the past few years, and a good sign for the future, after this year’s anticipated bounceback in earnings (which will bring earnings growth of about 30% in this current fiscal year, their FY 2021), the stock is trading for about 40X current year earnings and 33X next year’s earnings. That’s steep because investors have quickly fallen back in love with NVDA, but you can certainly justify it given the 20-30% earnings growth rate — I just have a tendency to be more conservative with NVDA, given the volatility of earnings and the memory of being bitten by their cryptocurrency-driven inventory glut last year, so I’d prefer to look for dips — NVDA looks pretty compelling now below $250, which was my “nibble” point before earnings (when it was in the $240s, so I could have bought more but did not), and I hope it will get back there, but at $290 it’s still a hold for me.
And that’s about all I’ve got for you today — it looks like Whitney Tilson is touting Alphabet (GOOG)’s Waymo, Aptiv (APTV) and NVIDIA (NVDA)… and maybe also throwing in a chipmaker or other auto supplier (I’ll guess NXPI, though it could be someone like Dana, or he could be double-dipping on Aptiv for different reports).
Will he be right? Despite what the “prophet” marketing materials say, Whitney is not routinely perfect about calling tops and bottoms. Yes, he has made a few very good calls over the years… but he has also made some terrible ones. Just because I agreed with him that Tesla was going down the tubes a year ago doesn’t make it any more right, we were both really, really wrong, at least so far — TSLA was around $250 or $275 when he wrote that it was the “beginning of the end for Tesla,” and within a year it had gotten to over $900 (it’s at $750 or so now).
So don’t rush to assume that he has the perfect buy or sell point for you, but these are some interesting ideas to consider in the autonomous driving space… and maybe it’s worth thinking about what happens to the world if this idea of “Transportation as a Service” supplants the US car-centered culture faster than we think. For me, I’d guess that Tilson would be less apt to jump to that “faster than you think” conclusion if he lived in Manhattan, KS instead of Manhattan, NY, but we’ve all got our biases … and it’s true that it is very, very hard to imagine the world changing quickly — but very profitable if you guess the direction before everybody else.
And as you might imagine from the thoughts percolating through what I wrote above, in a lot of ways the challenge for those eager to invest in electric car technologies or self-driving car technologies is that the leading companies are often also still very dependent on conventional cars, or on other completely different businesses… though in a positive for folks like Aptiv, NXP or Visteon (VC, they were to Ford what Delphi/Aptiv was to GM), it’s also a business where entrenched suppliers are hard to supplant — nobody wants an untested startup providing sensors or cockpit electronics just to save a few cents. So they may be in a tough and competitive business, with challenging top-line revenue if auto sales fall, but they probably won’t be beaten out by a kid in a dorm room anytime soon.
I’ll leave you there, dear friends, and let you make your own call — if you’ve got thoughts on Waymo or Aptiv or NVIDIA or any of the other ideas we touched on above, or some better plays on these sectors that I haven’t mentioned or imagined, well, please do jump in with a comment below to share your thoughts. Thanks for reading!