For a while now, I have been bearish on traditional automotive stocks, owing to what I believe is a fundamental threat posed by ridesharing companies like Uber (Private:UBER) and Lyft (Private:LYFT). As I have explained before, the threat is extremely multifaceted. But one of the biggest threats posed stems from the immense potential these companies have to pool riders into fewer cars through "true ridesharing," reducing the number of vehicles required to satisfy America's transportation needs.
In my opinion, General Motors (NYSE:GM) and Ford (NYSE:F) investors should be very concerned about the automotive sector's ability to respond to this challenge. I have received a lot of pushback on this from readers here who believe that I am either greatly exaggerating the threat or even just seeing smoke where there is no fire. But I believe that the supporting evidence for my hypothesis is now becoming quite substantial.
Sales Decline Evidence Building
One commentator on my previous article even asked me outright, "This Uber business has been around now for a bit, is there any empirical evidence that new vehicle sales are dropping?"
Even at the time, the argument could have been made that the answer was yes. Seeking Alpha's own Jeffrey Snider first pointed out the growing evidence of a "plateau" in automotive demand. Not long after, Jeff Blumley's analysis of the August 2016 automotive data suggested that demand was more than flattening, it was falling. Both Jeffs did a great job putting together the various data points to create a complete picture for the readers, and I commend the work. Nikhil Gupta also did research on the increased shorting activity in regards to Detroit's Big Three, although he felt at the time that FiatChrysler (NYSE:FCAU) was the only company that deserved shorting.
I don't just put these articles forward to highlight some good articles, nor just to buttress my own position. While these three authors all, like me, expressed varying degrees of alarm about the automotive sector in the short term, all three expressed confidence in the industry's long term viability and even growth. In other words, the bearish position six months ago wasn't even really all that bearish. My argument that a fundamental threat might be about to emerge was well out of the mainstream.
Numbers Take Turn For The Worst
In part, that was because on the surface, auto sales didn't really seem to be in trouble. As recently as November, forecasts were for sales to hit a record-high, at an almost 18M annual pace.
Contrast that with the projections six months later. As of now, alarm about the auto sector has officially gone "mainstream." Morgan Stanley auto analyst Adam Jonas began by slashing 2017 unit sales projections by 1 million units to 17.3 million. This follows three straight months of underperforming sales figures in the auto sector.
Even worse, though, according to Jonas, is what's to come. The 2018 numbers were slashed 2.5 million units to 16.4 million. And Jonas is projecting 2019 and 2020 to be at just 15 million units per year, a shockingly low number that represents a nearly 20% contraction of the market. Jonas cut price targets on 15 automotive companies, including Ford which saw its price target cut by double-digit percentage points.
As the final burst of chill wind, Jonas also warns that his 15 million figure will only be maintained in future years if the government creates new incentives to encourage car purchases, a tactic last used during the depths of the Great Recession.
Explaining The Drop?
Interestingly, while Bloomberg reported this new investment note from Morgan Stanley, it does not concede outright that what we are seeing is the result of Uber's and Lyft's increasing presence in our transportation ecosystem. Or at least it is not willing to put them center stage. Rather, Bloomberg lists ridesharing services among a list of several downward factors influencing the auto market, and last on the list at that.
I think Morgan Stanley is right to make substantial and even drastic cuts in sales estimates and price targets, but I reject Bloomberg's unspoken argument that ridesharing is somehow tangential to or merely a small portion of the explanation for those reductions. In my opinion, ridesharing is the primary factor causing declining sales right now, and the effect is not going to reverse, even when credit growth resumes. It is going to accelerate.
Bloomberg listed burgeoning inventory of used cars, self-driving technology, electric cars from new market entrants like Tesla (NASDAQ:TSLA) and ridesharing as all "creating pressure on the traditional auto industry model."
EVs/SDVs Aren't Nearly Big Enough
Of these four, self-driving technology is still in testing and there are no current active deployments, beyond some of the relatively un-ambitious anti-collision software which is more assisted driving than self-driving. Even if SDV accounts for some portion of the 15 million unit years, it is not being deployed now - 1 million fewer units in 2017 - or next year, when 2.5 million units of sales have just been cut.
Electric cars are currently being sold, but not in sufficiently large quantities to produce this kind of drop-off. EV sales in the US totaled 150,000 units last year and are trending only slightly higher this year. If anything EVs, not Lyft and Uber, belong at the back of the list, as they represent, at most, only 10% or so of the adjustment.
It is also not clear why selling more EVs would produce a drop in car sales, at least this soon in the process. Tesla has been saying that its cars last far longer than ICE vehicles, and over time one would expect that to reduce the number of new cars that needed selling if old cars were lasting longer.
But that will only become a factor when Tesla's have penetrated the auto fleet in large enough quantities that Teslas are replacing other Teslas. As long as the car being replaced is an ICE vehicle, as they almost are now, the sales rate should be holding steady, because the number of new cars that are needed is at the same level. A Tesla may last 400,000 miles, but if the car it replaced only lasted 150,000 miles, a prospective Tesla buyer who owns an ICE car can only go 150,000 miles on his current vehicle before he needs a replacement - just the same as the ICE owners who aren't considering Teslas as their next vehicle.
Used Cars Are Only A Symptom
As for the used car market, the argument there is that rising inventories are producing lower prices and better deals on used cars, which reduces customers inclinations to buy new ones at full price.
This is true so far as it goes, but it just doesn't go very far. Yes, lower pricing on used cars should, ceteris paribus, reduce sales of new cars. But what are used cars, except new cars that haven't yet reached the end of their useful lives?
Because the US long since became a mature market in terms of car sales (the US currently contains a fleet of over 260 million registered passenger vehicles) new car sales today are, aside from proportional population growth, just replacements for older cars that have reached the end of their lives. When used cars are "piling up," it's really just a way of saying that they haven't had miles put on them as fast as expected, and so there are more of them still in the fleet.
In order for used cars to accrue in large inventories and pressure prices, then, there must be a material reduction in the amount of miles being put on them. This brings us to the fourth reason cited, the rise of carpooling services like Uber and Lyft.
As I explained in my initial article, these services have real potential to substantially reduce VMT (Vehicle Miles Travelled) because their true ridesharing options, Lyft Line and UberPool, can group multiple groups of riders traveling in the same direction into a single vehicle. While a single rider using Uber/Lyft instead of their own vehicle only transfers VMT between vehicles, multiple riders pooled actually reduces them.
And evidence has been building for some time that a large and growing share of total ridesharing miles are accrued in these pooled services. Lyft Line was already over half of total trips in San Francisco when I wrote my article last year, and it was growing at a healthy clip. Lyft now says that 40% or more of rides in most major cities are Line rides.
While the far larger Uber will not disclose detailed operational metrics, the trends we have observed in the car market over the last few months is entirely in keeping with what such growth would produce. Total VMTs are reduced, which leads to more used cars in inventory. By the power of the invisible hand, used car prices are slashed, which reduces demand for new cars. Exactly what an efficient market would do, since fewer miles travelled means fewer replacement cars are needed per year.
Jonas is only one analyst, of course. But his projection is more of an acknowledgement than a hypothesis. It follows three months of underperforming industry sales which in turn follows several previous months of headline growth that concealed troubling indicators beneath the surface. In making his new projection, Jonas and Morgan Stanley are more reporting a trend that's already here than they are postulating it coming into being sometimes in the future.
What that trend means for automakers will depend on how quickly they make the adjustment. As I noted in my previous articles, true ridesharing will not eliminate the need for new cars, just substantially reduce it. It is also likely that the car itself will become an intermediate good in a growing number of cases, while the final product sold will be the ride itself - much like we already consider public transportation. We do not buy a bus when we buy a bus ticket, but there must still be someone to manufacture the buses we use.
US automakers have been moving at different rates to respond to this trend. GM has been the most aggressive, taking a 9% stake in Lyft, which I estimate to be worth as much as $5 billion, ten times what GM paid for it.
GM's stake in Lyft goes beyond mere asset appreciation, however, as it is also becoming one of the primary providers of vehicles to Lyft drivers to use in conducting their business. This provides GM with what will become an increasingly pivotal outlet for their vehicle sales as private car ownership becomes increasingly less competitive with ridesharing.
Ford's response has been much less proactive. It's only notable investments so far are a van-sharing service, Chariot, and a bike-sharing service. But it has made no effort to deploy a four-seat car ridesharing service on a large-scale, nor partnered with anyone who has. FiatChrysler has done even less to respond than Ford.
I believe the evidence is growing of a material decrease in auto demand, with Morgan Stanley now calling for a 20% market contraction in little more than three years. While several changing dynamics have been cited as possible causes, in my opinion most of them are of an insufficient magnitude to explain such a shift, or they are simply not causes at all but rather symptoms.
I believe Lyft/Uber and ridesharing are the pivotal factors at play in this market decline, and that the decline may well prove to be more than a temporary phenomenon. While GM is undoubtedly the least bad of the Big Three in addressing this, it's not clear any automaker has fully faced up to the challenge. I would avoid all automotive stocks until their response to ridesharing becomes clearer.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.