The Case For Driverless Cars: Bonus White Paper

 | Mar 11, 2018 | 9:00 AM EDT
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"New Poll Reveals Nobody Is Excited About Riding in Driverless Cars."

That's a recent headline in The Observer that sparked an intriguing conversation between ActionAlertsPlus portfolio manager Jim Cramer, senior portfolio analyst Jeff Marks and myself, the portfolio's research analyst, last weekend regarding whether self-driving cars have a future in mainstream society or if a lack of trust will be their downfall. The conversation was critical to our portfolio as our longer-term outlook on several positions is based, at least partially, on the ability of autonomous vehicles to go mainstream (think Nvidia (NVDA) , Alphabet's (GOOGL) Waymo and Apple's (AAPL) project "Titan").

However, before digging into our own view on the subject, I want to share some quotes from the article that sparked the debate (readers can check out the entire piece here):

  • "According to a new Gallup poll, Americans are 'hitting the brakes' on autonomous vehicles. This is true across all age groups and genders. The survey of 3,297 U.S. adults was conducted in September and October, and results were released last night. The poll reports that 54% of people are unlikely to use self-driving cars. Furthermore, 59% of respondents would be uncomfortable riding in them and 62% would be nervous sharing the road with them."
  • "Young people were most excited about autonomous vehicles, with 36% of 18 to 35-year-olds reporting they would ride in one. On the other side of the spectrum, only 12% of people over the age of 65 would be comfortable in a driverless car. 'The technology may be ready, but Americans aren't,' Gallup executive director Brandon Busteed told Observer in an email."

The implications to our investments are clear -- if nobody trusts the vehicles, nobody will buy or use them and a significant portion our longer-term theses goes bust. That's bad for us, but even worse for the companies sinking literally hundreds of millions of dollars into this endeavor.

However, while the statistics don't paint the best picture, we decided to look at the case a different way: Who will push for autonomous vehicles? Who will be the first among the general population to embrace the benefits of self-driving technology?

We came up with a few categories of people that we believe will be the first to seek out the new technology, the thinking being if we can come up with a large enough population of people reasonably willing to go first, they would be able to prove to the rest of the world that the technology can be relied upon. Thus, the age of self-driving vehicles would take hold.

Target Market No. 1: Those Who Can't Drive

The first and most obvious group to us were people that, by no choice of their own, rely on others to get around. This includes disabled or handicapped individuals. Think the blind (even in one eye reduces depth perception), or those paralyzed in some way that prevents them driving.

This population could also include individuals perhaps too young or too old to drive -- the young being age-restricted, the old potentially at a point where reflexes and motor skill simply aren't up to the task. In fact, according to the U.S. Census Bureau, the number of Americans over the age of 65 has grown from 35 million in the year 2000 to 49.2 million in 2016. The percentage of citizens over the age of 65 increased from 12.4% to 15.2%.

And if that sounds like a big jump, just think that in the year 1900, when the over-65 population was only 3.1 million. On top of that, the U.S. median age (the age at which half of citizens are older and half are younger) is also increasing. And with life expectancies on the rise thanks to advancements in medical technology, you can be assured this trend will continue. According to a 2016 report published by the Population Reference Bureau, the number of Americans over the age of 65 will grow to roughly 98 million by 2060 and account for nearly 24% of the total population.

The trend is clear, Americans are getting older, and the percentage of Americans approaching those years where driving begins to become a danger to themselves and those around them is increasing:

The Nation's Median Age Continues to Rise

Source: U.S. Census Bureau, available here

My own grandmother was an amazing driver well into old age, but in her final years, I would be lying if I didn't admit that every time we piled into the car and let her drive to the local restaurant or supermarket (because she insisted) we were all a little on edge and there were at least three sets of eyes on the road. Jeff Marks had a similar scenario where his grandfather opts for Ubers to get around. And it's not just us, there are entire businesses that are reliant on driving those who cannot drive themselves or use public transportation, Access-a-ride being the mot obvious example.

And while today's senior citizens might not be the most open to autonomous vehicles, as time passes, the "new" elderly population will have grown up in a world where this technology is becoming the norm. Just ask yourself this, "How many kids under 15 even know what a flip phone, VHS, floppy disk or Walkman is?" The same will be true for cars. The kids of the future won't even know what to do with a steering wheel and pedals.

Target Market No. 2: Those Who Shouldn't Drive

The there are those who can drive but at times must rely on others, like when a group of friends requires a designated driver. The perfect example here would be college kids. Chances are, if you went to college, you knew somebody that was, at some point, drinking and driving, especially if like me you went to a college that wasn't in the center of a major urban area. I knew a guy that once said he was so hammered the night before that he only realized he drove into the city because he (luckily) woke up the next day with a bar stamp on his hand. Now, think of every parent that worries about this when their kid leaves to college. And if they aren't worried about their own kid, they're worried about the ones like this that could run them over or be their kid's "designated driver."

And while we're on the subject of drunk driving, don't forget about the other forms of intoxication that a breathalyzer can't catch, or texting, or driving tired, or speeding and driving recklessly, or driving during twilight hours when human eyes have a hard time adjusting, or even the simple possibility of a random distraction because the person in the back seat needed a new song on the radio ASAP. Did you know that according to the Centers for Disease Control and Prevention, 29% of all traffic-related deaths were a result of "alcohol-impaired driving crashes." That's 10,265 lives lost because of drunk driving. And that's just the number of intoxicated incidents resulting in death. In fact, CDC goes on to note that, "in 2015, nearly 1.1 million drivers were arrehttp://secure2.thestreet.com/cap/prm.do?OID=031628sted for driving under the influence of alcohol or narcotics. That's one percent of the 111 million self-reported episodes of alcohol-impaired driving among U.S. adults each year."

Annual Self-reported Alcohol-impaired Driving Episodes among U.S. Adults, 1993-2014:

Source: CDC. Behavioral Risk Factor Surveillance System (BRFSS), 1993-2014. Available here.

To further illustrate this point, I want to share data released by the U.S. Department of Transportation's National Highway Traffic Safety Administration (NHTSA) in October on fatal traffic crashes in 2016:

  • Distraction-related deaths (3,450 fatalities) decreased by 2.2%;
  • Drowsy-driving deaths (803 fatalities) decreased by 3.5%;
  • Drunk-driving deaths (10,497 fatalities) increased by 1.7%;
  • Speeding-related deaths (10,111 fatalities) increased by 4%;
  • Unbelted deaths (10,428 fatalities) increased by 4.6%;
  • Motorcyclist deaths (5,286 fatalities, the largest number of motorcyclist fatalities since 2008) increased by 5.1%;
  • Pedestrian deaths (5,987 fatalities, the highest number since 1990) increased by 9%; and
  • Bicyclist deaths (840 fatalities, the highest number since 1991) increased by 1.3%.

Source here.

In aggregate, 37,461 deaths occurred in traffic crashes, a 5.6% increase from 2015. And while self-driving vehicles may not be the answer to all fatal crashes, they certainly address a number of the causes shown above as these vehicles do not drink, become drowsy, get distracted or speed. And if we assume these factors are addressed by the adoption of autonomous vehicles, it could also be safe to assume that the number of unbelted-related deaths would also come down as well, as pedestrian, bicyclist and motorcyclist deaths related to these factors.

We believe all of these factors will be major influences that people, especially those with family members new to driving or kids on their way to college, will consider when deciding whether or not to "buy autonomous." Parents, imagine never having to warn your kids about the dangers of drunk driving or worry that their friend convinces them its OK because they've "only had a few." We also believe those who don't drive at all could push for autonomous vehicles as they will essentially eliminate even the potential for these types of human error related accidents. We've all seen those tragic news stories where an innocent bystander gets killed because of a drunk driver.

Target Market No. 3: Those Who Don't Want to Drive

While we're on the topic of young adults totally capable of driving, it's also worth mentioning that the number of young adults even bothering to get their drivers license is on the decline. In fact according to a 2016 article published in USA Today, in 2014, 76.7% of those aged 20 to 24 had obtained their license, down from 79.7% in 2011, 82% in 2008 and 91.8% in 1983, not a great sign for auto manufacturers, unless of course they can think of a way to sell cars that don't require a drivers license.

And while part of this can be attributed to the rise of ride sharing services (Uber, Lyft, etc.), the decline is also a result of a rise in car prices, which (according to the same article) increased by roughly 20% between 2005 and 2015. That said, anyone who has ever bought a car knows the initial cost is the least of your worries. After the purchase comes the maintenance, gas, insurance and parking, several factors that make it even more difficult for Millennials fresh out of college, burdened with record levels of student debt, to even consider owning a car.

However, with self-driving cars and other advances being made on the electric vehicle front, the cost to fill up the tank is decreasing and the cost for insurance will have to come down, or potentially be transferred to the manufacturer. Why would someone pay the same for insurance if a self-driving vehicle can essentially eliminate human error? As for parking, I'll touch on that momentarily.

Then there's the case of your average Joe (or Jane) who doesn't own a car because they live close to work. Using myself as an example (a 27-year-old with a driver's license and no car, who lives and works in New York City), I can tell you one of the biggest factors keeping from moving out of Manhattan (where I was born and raised), to a place where rent would be significantly cheaper is the fact that I need to be at work at 7 a.m. So, my alarm is going off at 5:30 a.m. at the latest, and after a long day, the last thing I want to do is deal with the hassle of a commute outside of the city during rush hour.

In fact, according the Library of Congress' website, "Between 1880 and 1900, cities in the United States grew at a dramatic rate. Owing most of their population growth to the expansion of industry, U.S. cities grew by about 15 million people in the two decades before 1900." It also notes that, "a steady stream of people from rural America also migrated to the cities during this period. Between 1880 and 1890, almost 40% of the townships in the United States lost population because of migration." So essentially, cities emerged out of this need to be close to work. However, with the growing ability to work remote and the coming of self-driving cars, the need to be close to work is becoming less of a reason to pay sky-high city rent.

My point here is over a century of having to live close to work, and more importantly the rapidly rising costs of that necessity, could come to an end if we embrace this new technology. Again using myself as an example, if I were to buy a car and move out of the city today, not only would my commute time increase and any money saved on rent would go to parking expenses, which can be over $400 a month in the city, driving in to the city will require my full attention, no more checking e-mails on the way in.

However, if I had a self-driving car, I could move out of the city, save money on rent and use the added time on my commute in a productive manner (or even catch up on some sleep). On top of that, I won't have to worry about parking because I can simply have the car drive around until it finds a good free spot to park for the day, send it back home for a recharge, or better yet, send my car out to work as a self-sustained ride sharing service, something Tesla CEO Elon Musk previously pointed to as potential means for one day offsetting the cost of owning a Tesla.

As for my commute time, even living and working in the city, it takes me 45 minutes door to door. That's 1.5 hours, or over 6% of my day (over 8% if you don't count sleep) that is lost every day. With a self-driving car I would gain almost all of this time back as my car would be my office on the go, so even if my commute time increase to one hour each way (two hours total), I would be swapping 1.5 hours of unproductive time for two hours of productive time.

Target Market No. 4: Trucking Companies

The one last group I want to address are the companies battling for truck drivers. The number of truck drivers continues to lag demand and companies are feeling the shortage.

According to a recently published article by National Public Radio, the shortage is growing and even causing, "some retailers to delay nonessential shipments or pay high prices to get their goods delivered on time." The article goes on to note that "a report from the American Trucking Associations says more than 70% of goods consumed in the U.S. are moved by truck, but the industry needs to hire almost 900,000 more drivers to meet rising demand."

In fact, according to the ATA, there's been a shortage for 15 years, but when the Great Recession hit in 2008, shipped volumes and thus driver demand declined. However, with the U.S. economy back in expansion, mode the shortage is once again becoming an issue.

Part of the cause for the shortage is age. According to Derek Leathers, the CEO of Werner Enterprises, a trucking company based in Omaha, "demographics are working against the industry," Leathers also notes that, "the trucking industry average age is about 10 years older than the average age across other comparable industries like manufacturing and construction. So as those retirements are taking place, we're just not seeing the same level of new entrants into the industry."

So, once again, we see an aging population causing issues that self-driving vehicles can address. And we've already seen this begin, as companies such as Walmart (WMT) , PepsiCo (PEP) , Anheuser Busch InBev (BUD) , J.B. Hunt (JBHT) , Sysco (SYY) , DHL Supply Chain , Ryder (R) and more have all put in pre-orders for the recently revealed Tesla semi-truck. That's a vehicle that will initially launch as semi-autonomous, but according to Musk, would eventually be offered in a self-driving version.

So, Self-Driving Cars Seem Inevitable

It's for these reasons we ultimately came to the conclusion that while it will take time, we will all be riding around in autonomous vehicles eventually. It may start with those who need it at first, perhaps because they are simply more willing to take the risk of being first in exchange for increased independence. But in time, we believe that everyone will find a reason to own one.

In fact, according to Reuters, automakers such as Nissan (NSANY) and Waymo (owned by Alphabet (GOOG) , (GOOGL) ) are already looking to tackle the trust issue by working on technology (already being used by NASA and the military) that would allow for a remote human operator to monitor the vehicle and take control of the car if necessary.

This can be a key factor in adoption as it will allow manufacturers, or autonomous ride-sharing services to implement a human back-up system without the need for a person to be physically present in the car, thus enhancing trust by early adopters. It would also allow for backup operators to be employed at a rate less than one person per vehicle (which would essentially eliminate the efficacy gain of autonomous vehicles) as the cars will only need to be monitored in certain instances. And it will be highly unlikely that all autonomous vehicles will require human control at the same time, similar to the way a home-security providers today (such as ADT) do not need to employ one new human monitor for every new home hooked up to the system. The need for this will also likely diminish as systems are perfected.

So, just ask yourself, how great would it be to have your own personal driver that doesn't cost you more than the price of the car and that is there every single time you walk out to your vehicle? Now ask yourself, how great would it be to have that and potentially your own ride-sharing service (as Musk suggested) with a "driver" that requires nothing but routine maintenance and a recharge? I for one think it would be an incredible efficiency booster -- and should Musk prove to be right, a potentially strong investment.

All that said, we all (Jim, Jeff and myself) realized that there are still a number of issues that need to be addressed even beyond the lack of trust, such as the disruption these vehicles will cause in other industries. And then there's the utilitarian issue. If three kids run into the middle of the street after a ball and a self-driving car with two passengers has enough time to either run them over or drive off the road -- saving the three but potentially killing the two -- what does it do? These issues, along with more thoughts on self-driving vehicles, are things we are actively discussing and plan to share with ActionAlertsPlus club members as they develop.

Before I finish, let me just add that you don't have to take my word for all of this. I'm not an auto-industry expert, I'm not the CEO of a major manufacturer -- in fact, I don't even own a car. But ask yourself this: "If drivers really don't want autonomous vehicles, then why is almost every major auto manufacturer going after the Holy Grail that is Level 5 autonomous driving?" Why is Sergio Marchionne, CEO of Fiat Chrysler (FCAU) and savviest, most successful auto CEO of our time -- partnering with Waymo?

Don't worry, he answered the question himself when he stated that "in order to move quickly and efficiently in autonomy, it is essential to partner with like-minded technology leaders." Marchionne went on to note that "our partnership with Waymo continues to grow and strengthen; this represents the latest sign of our commitment to this technology."

How to Play This Trend

As for how to go about investing in self-driving cars, look for those companies that develop products that will someday be required for fully autonomous vehicles to reach their full potential. If you've been a member of ActionAlertPlus for a while, you've probably got a good idea of at least a few. We absolutely love Nvidia because the only way to process the massive amounts of data that autonomous or even semi-autonomous vehicles need in real time is to use GPUs, of which Nvidia makes the best.

There's also Alphabet, a company leading the way in artificial intelligence, and whose Waymo unit is arguably the most advanced self-driving car project today.

Members should also recall we used to hold a position in NXP Semiconductors (NXPI) before Qualcomm (QCOM) raised its tender offer to $127.50 and we decided to book our healthy profit. We knew Qualcomm would raise its initial lower offer for NXPI because the automotive-semiconductor industry is simply too hot to pass up and NXP Semi has a rapidly growing automotive segment.

Another name (one not currently in the AAP portfolio) that's jumping in on the action is Intel (INTC) , which acquired the advanced-driver-assistance-system developer Mobileye in 2017. Apple also has a project in this space called "Project Titan." However, management has been hush-hush about it and details are limited.

These are just a few names out there. There are plenty of others that play to this theme directly -- vehicle manufacturers such as Tesla (TSLA) is the most obvious -- or indirectly, like Snap-On (SNA) , which as a growing diagnostics business that has evolved due to the computerization of cars.

The last piece of investment advice I'll give is this, do not forget about the residual businesses and industries that will come of this, the ones we've yet to think of because at the moment we're still focused on getting the car to where it needs to be. Think of it like this, the "App Store," which has created countless jobs and billions in revenue, didn't exist until Apple developed the hardware, the iPhone. Autonomous vehicles are the hardware, but the software that comes of it could become even larger as developers seek out new ways to entertain travelers that now have hours (or potentially days as autonomous vehicles won't get too tired to keep driving) of travel time on their hands with nothing to do. Think of all the Netflix (NFLX) you can watch with that time!

With that, I'll end with this, surely, before airplanes became popular, the idea of traveling around in a gigantic metal train car with wings seemed insane to people. I can't imagine how many people said they would NEVER fly because they simply didn't trust it, and who could blame them? But now we do it almost without thinking, statistically it's even safer than driving. Although I bet autonomous vehicles will give planes a good run for their money!

This white paper was originally sent to subscribers of Action Alerts PLUS, Jim Cramer's charitable trust and investing club. Want to be alerted before Cramer buys or sells NVDA, GOOGL, AAPL or PEP? Learn more now.

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