Having followed the development of autonomous driving closely, I have been interested in seeing how the evolution of the autonomous driving will impact the ride-sharing industry as well as traditional automakers. I believe that while it might take automakers more time to bring fully autonomous products to the market, the auto industry will benefit more from keeping the hardware and software in house.
The Current Market:
The current ride-sharing market is dominated in the United States by Lyft and Uber, which are both private. Other major players in the international market include Didi Chuxing, Curb and Grab. The flexibility and low overhead of services like Uber and Lyft have made them well established. Car sharing, through short-term rental services like Zipcar, Car2Go and Maven (owned by GM) is also up. Both these services have grown to become very valuable in urban areas and hold promise for continued growth.
Some would argue that these new developments are changing car ownership trends, and that the automakers are unprepared. However, this change has not been lost on auto industry giants like GM (GM), Ford (F) and Volvo (OTCPK:VOLVY).
Recently, Volvo made an announcement that it will offer its 2018 XC 40 subcompact crossover as part of a program that makes owning a car similar to owning a phone on contract. For a monthly fee, Volvo will cover all maintenance, insurance and wear and tear, and gives the consumer the option to upgrade to a newer car after 12 months. This is similar to Book by Cadillac, a $1500 a month program that gives the consumer the choice of vehicle and covers insurance and maintenance. Ford started a program called Ford Credit, which allowed consumers to split the lease on a new vehicle; although an interesting idea, it has failed to gain much traction with consumers.
To further add complication, all of these companies are currently working on autonomous cars for private and ride-sharing usage. The partnerships here are quite convoluted, with GM and Ford partnering with Lyft, Uber working with Volvo and numerous in-house projects by all of the companies. All of these major players recognize the need to begin offer a “transportation as a service” products for consumers young and old, when car ownership may be an unnecessary financial burden or a hassle in a city.
Hardware vs. Software: Where Does the Value Lie?
I believe that the automakers have an advantage over their ride-sharing peers like Lyft and Uber. Uber has taken a strong stance that it believe that it wants to make autonomous driving akin to a plug and play kit that can be added to any car. Yet major auto industry companies want a piece of the action, and they want autonomous driving features to be part and parcel with their products. I believe that while Uber and Lyft have a great model for using software on top of existing infrastructure to create value for the consumer, automakers have the distinct advantage of controlling both the hardware and software.
Since Uber and Lyft are both privately held, I would like to consider the implications on Ford and GM. Much ink has been spilled on the fate of Detroit, but I do not think that Uber and Lyft will kill the traditional auto industry. While I think that future vehicle sales will go down, personal vehicles will still be prominent, particularly in suburban and rural areas, or in situations when the convenience outweighs the cost.
GM invested $500M into Lyft in 2016, which is about a 9% stake. It also supplies vehicles for Lyft drivers to drive on a lease, and two companies are working on developing an autonomous ride-sharing vehicle fleet. Similarly, Ford is working on developing autonomous vehicles for ride-sharing and other fleet applications, with speculation about working with Lyft as well.
By capturing part of the ride-sharing market, GM and Ford could benefit from selling both the customer the hardware of the vehicle itself, as well as the software used for autonomous driving and the services they can provide. From GM’s investor day publications, GM forecasts that the market will be worth $1.6T. Through full control over supply and the high barriers, I think that the scale that auto makers have access to will allow them to develop a larger fleet of autonomous vehicles for ride-sharing than their peers like Lyft and Uber.
Sketch of the cost per mile against Vehicle Miles Traveled (VMT) used to forecast future market cap for ride-sharing. AV stands for autonomous vehicle; TAM stands for Total Addressable Market. (Source)
In conclusion, the attractive P/E for GM and Ford at 9.7 and 11.3 respectively, coupled with healthy fundamentals make these stocks at the very least a good stock to hold for the dividend and the potential for growth in today’s auto industry. However, with a foot in the door in the future autonomous ride-sharing market, I am bullish on GM and F and their ability to firmly establish themselves. As for Uber and Lyft, I think that they will remain large players in the market, but it is hard to forecast much without public information.
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.
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