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3 Top Driverless Car Stocks

Chris Neiger, The Motley Fool

What if I told you there was a new technology that had the power to save hundreds of thousands of lives over the next few decades? This technology could make it easier for people with physical disabilities and those who are elderly to become more mobile. It also has the potential to create new market opportunities that could be worth $7 trillion in the next three decades. Would you be interested in an investment opportunity like that? Because that's exactly the opportunity the burgeoning driverless car market is creating.

Driverless cars (also known as self-driving cars or autonomous vehicles) aren't just science fiction anymore. A slew of automakers and technology companies from around the world are already building all of the necessary hardware and software to make these vehicles a reality on our public roads -- and they'll be here faster than you think.

Nearly every major automaker in the U.S. and abroad is already testing driverless cars with varying levels of self-driving automation, and research by IHS Markit shows that by 2040 nearly 26% of new vehicles sold worldwide -- or 33 million vehicles -- will be fully autonomous. That will be a massive increase from the estimated 51,000 driverless cars that will be on the roads by 2021.

Bringing self-driving technology to vehicles on the road -- even when they're not perfect -- could lead to far fewer vehicle fatalities over the long run. Research by the Rand Corporation found that introducing self-driving vehicles to public roads now will help them to become nearly perfect at driving by 2035. After that point, the vehicles will help reduce global vehicle fatalities by 1.1 million between 2035 and 2070. 

To fully grasp how these vehicles can make our lives safer -- and how investors can benefit -- we first need to understand the basics of how self-driving technology works.

The interior of GM's Cruise AV.

Image source: GM.

What exactly is driverless car technology?

First, let's unpack what a driverless car is by taking a closer look at some of the core technologies that make autonomous vehicles possible. Basically, you need to know that these vehicles use a combination of artificial intelligence (AI) and hardware to achieve their varying levels of autonomy.

For example, Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Waymo company, which was formerly called the Google self-driving car project, uses image recognition AI to tell when a pedestrian is walking in front of one of its self-driving vehicles. The on-board computer not only processes images in real time, but the use of machine learning allows the vehicles to learn from its experiences and then share that information with the rest of the company's self-driving fleet. In a recent blog post, Waymo said:

With machine learning, we can navigate nuanced and difficult situations; maneuvering construction zones, yielding to emergency vehicles, and giving room to cars that are parallel parking.

The company also uses AI to test cars in a virtual world. Waymo says it simulates 25,000 self-driving cars in a virtual world every day to learn from their environments and apply their virtual experiences to its real-world cars.

Rain and snow, for example, can pose a hurdle for self-driving car technology because they can interfere with image-processing sensors. To overcome this, Waymo's run its thousands of virtual vehicles in simulated snow and rain storms and used machine learning to filter out the weather distractions and allow the cars to see vehicles and pedestrians.

Another critical element of self-driving cars is the hardware that makes all of the automation possible. This tech includes everything from cameras to lidar (which bounces lasers off of objects to detect them), graphics processing units (GPUs), and onboard computers. All of this hardware gives vehicles computer vision, essentially allowing them to see the same things we see when driving.

GPUs

GPUs are an integral part of a driverless car's hardware because of their ability to process image information accurately and efficiently. For example, NVIDIA Corporation's (NASDAQ: NVDA) Drive PX Pegasus computer sits in the trunk of some driverless cars and uses the company's Xavier processors and embedded GPUs to process image and mapping data in real time. These supercomputers are important because fully driverless cars need to process 50 to 100 times more information than even the most advanced cars on the road, according to NVIDIA.

Lidar

The other type of crucial driverless car technology you need to know about is lidar, which stands for light detection and ranging. Lidar is the funny-looking cylinder that's spinning around frantically on top of many driverless cars. The cylinder is sending out laser pulses that bounce off of every object around it and allows the car to create a 3D image of its environment.

Lidar technology, like most tech, is getting smaller and cheaper all of the time. A typical lidar unit used to cost $75,000, but some experts believe that could soon fall to just a few hundred dollars, and eventually down to around $10 per sensor. To achieve that goal, lidar will likely evolve from a spinning, mechanical system to a solid-state one (with no moving parts). We're not there yet, but as this technology develops, the costs will begin to come down, and driverless car tech will be more easily implemented into a car's existing design.

It's also worth noting here that some carmakers, mainly Tesla (NASDAQ: TSLA), have opted not to use lidar for their semi-autonomous vehicles at all. Tesla's vehicles aren't fully autonomous yet, but the company says that it's building its vehicles with all of the necessary hardware to drive themselves in the future, which includes cameras, radar, and ultrasonic sensors. This means that Tesla's driver-assist system, called Autopilot, relies much more on cameras and the company's own computer-vision AI system to see.

The inside of a driverless car.

Image source: Getty Images.

The driverless car market is going to be huge

Driverless cars won't just be a convenient way to get around from point A to point B; they'll also transform how goods are shipped and could create nearly endless possibilities for new businesses.

One estimate from Boston Consulting Group says that the driverless car market will be worth $77 billion by 2035. That prediction includes sales of the actual driverless cars, but it doesn't encompass the full range of markets that will be created through autonomous vehicles.

For example, Intel released a joint report with Canalys in 2017 showing that self-driving cars could create what they called a "passenger economy" that will be worth $7 trillion by 2050. Intel believes two key areas of disruption will be in car ownership and the freight business.

Consumer market

Most cars are parked, not being used, about 92% of the time, and the tech giant believes that car buyers will begin to shift their habits to renting vehicles, instead of buying them. Driverless cars will create a consumer mobility-as-a-service market that will include autonomous ride-hailing services, peer-to-peer services, sharing ownership, as well as some direct ownership of cars as well. The chipmaker says that the passenger economy will begin to emerge between 2035 and 2050, as the self-driving cars reach about 50% of all vehicles sold globally.

Some automakers are already planning for the shift in consumer demand, which is why Ford (NYSE: F) has more than 90 autonomous vehicles being tested right now and is planning to release its own fully autonomous vehicle by 2021. The company plans on using its self-driving cars as part of future ride-hailing services.

For example, in early 2018, Ford set up a fleet-management center and began mapping the streets of Miami to use some of its driverless cars around town. The company is using the city to test out some of its tech and learn how to manage and service a fleet of self-driving vehicles throughout a large urban area. Ford has also partnered with Lyft to test out using Ford models with the ride-hailing service with the goal to eventually use autonomous Ford vehicles that will pick up users when they request a car through Lyft.

The freight and shipping market

It's not just consumers that will benefit from the driverless car market. Freight trucking and the shipping industry as a whole are poised to see a major upheaval as well. Autonomous semi trucks are already being tested in many areas around the world, including the U.S., Europe, and China.

In fact, a company in Texas uses its autonomous trucks to ship refrigerators from Texas to a distribution center in California. A human driver still sits behind the wheel to ensure that all of the tech is working correctly, but in the coming years, trucks like these will have enough experience of their own to drive across the country without a human on board.

These trucks allow for faster long-haul shipping -- because they won't need to stop as frequently as they would with a human driver -- and could help solve the current driver-shortage problems. By 2024 the U.S. will be short about 175,000 drivers, up from the current shortage of 50,000 drivers, according to Wired.

"The emergence of pilotless vehicle options will first appear in developed markets and will reinvent the package delivery and long-haul transportation sectors. This will relieve driver shortages around the world and account for two-thirds of initial projected revenues," the Intel driverless car report mentioned.

GM, Waymo, and Aptiv will likely dominate the autonomous vehicle space

I've already mentioned a handful of companies that are making some big moves in the driverless car market, but let's take a deeper dive into three companies -- Alphabet's Waymo, General Motors (NYSE: GM), and Aptiv (NYSE: APTV) -- that are poised to dominate in the coming years.

Company

Ticker(s)

Market Cap

Alphabet

NASDAQ: GOOG, NASDAQ: GOOGL

$742.1 billion

General Motors

NYSE: GM

$53.6 billion

Aptiv

NYSE: APTV

$25.7 billion

Data source: Yahoo Finance.

General Motors

Let's start with General Motors, not only because it's the only automaker on this list, but also because it may have the most to gain -- and lose -- in the driverless car market.

If you're surprised that GM tops this list, you shouldn't be. The 125-year-old automaker has consistently earned a spot in the Navigant Group's leaderboard for driverless car technology. That's because GM, under CEO Mary Barra, has been laser-focused on not just keeping pace with driverless car tech companies, but surpassing them.

Take for example GM's $1 billion purchase of Cruise Automation back in 2016. Cruise is the AI company that GM is now using to bring semi-autonomous features to its vehicles, and the same one it will use to bring fully autonomous vehicles to roads by next year.

Shortly after the purchase, Barra said that "Cruise Automation is running as a start-up. Not only are they responsible for the technology, but they're responsible for the commercialization -- so the entire business."

In this sense, GM can do what it does well -- mass-produce vehicles -- and let Cruise do what it does, which is to turn those vehicles into self-driving ones. The advantages for GM in the driverless car space is that it's the only company to have already mass-produced self-driving vehicles at one of its factories.

The company converted part of its Orion Assembly plant in Michigan to add cameras, lidar, and other sensors to its Chevrolet Bolt. Last year the company said it had already mass-produced 130 autonomous vehicles for testing.

But GM went another step further at the beginning of 2018 when it debuted the Cruise AV, a fully autonomous (hence the AV name), all-electric car that doesn't have any pedals or a steering wheel. The Cruise AV is currently being tested in a handful of cities across the country and will be implemented into a ride-sharing program in 2019.

GM could begin testing ride-sharing in a few ways, first of which would be using its current $500 million stake in Lyft and add its driverless cars into the ride-sharing company's fleet. GM also could easily add the Cruise AVs to its current car rental company, Maven. Maven currently allows users to rent vehicles in some large cities, but the company has hinted that Maven's future may be in renting out self-driving vehicles to transport customers around town.

Either way, it's clear that GM's current moves are helping the company lead the driverless car pack. It's worth pointing out that GM isn't bringing in any revenue from driverless cars right now, and that it'll likely take years before autonomous vehicles add anything to the company's bottom line. But the automaker is smartly combining its decades of vehicle manufacturing expertise with its Cruise Automation purchase and has used both to give itself a lead in this burgeoning market.

Waymo's driverless minivan on a road.

Image source: Waymo.

Waymo's driverless car prospects are in the fast lane

If there was one company that is keeping pace with GM's driverless car tech right now, it's Alphabet's Waymo, formerly known as Google's self-driving car project. Waymo has been developing its driverless car software for years and has already logged 5 billion miles of simulated autonomous driving and more than 5 million miles of real-world driving.

The company has made lots of progress this year by launching public trials of its autonomous vehicles in Phoenix, Arizona. The beta testers, who ride around in autonomous vehicles that run on Waymo's tech, are part of the general public -- not driverless car experts.

The vehicles are supplied by Fiat Chrysler, and mainly consist of Pacifica minivans for now. Waymo has big plans to launch a ride-hailing service for the masses that includes everything from minivans to high-end luxury cars. To that end, Waymo forged a partnership with Jaguar Land Rover to order 20,000 all-electric Jaguar I-PACE luxury sedans to add to its self-driving fleet over the next few years, on top of the 100,000 Chrysler Pacifica minivans Waymo ordered just a few months before that.

The company said in a blog post at the time:

The self-driving products of the future will be designed around passengers, not drivers. That means riders will be able to choose from a broad array of options that will match their particular needs: one for working remotely as you commute, one for dining with friends, even one designed for napping! The ultimate goal: with Waymo as the driver, products tailored for every purpose and every trip.

But Waymo isn't content in moving just people from place to place. The company wants to tap into the vast freight market, and it announced this year that it had started up a pilot program in Atlanta to move freight for Google's data centers using autonomous semi trucks powered by Waymo technology. In fact, the company already has more than a year's worth of experience testing its autonomous trucks in Arizona and California.

Of course, Alphabet's main source of revenue still comes from its advertising sales through Google. In 2017, Alphabet earned about 86% of its top line from Google's advertising division. But Alphabet has consistently focused its attention on building its self-driving car project into a viable business.

Waymo says it'll officially launch a driverless ride-hailing service to the public later this year, and that by 2022 it could deliver up to 1 million trips per day. The company will start small, building on its pilot program in Arizona first, and then likely branch out to more cities.

The key thing investors need to remember is that Waymo's years of self-driving experience, including its millions of miles of real-world driving and billions of miles of simulated driving, give the company a considerable advantage over the competition. The global ride-hailing market is expected to reach $285 billion by 2030, and Waymo's early lead with its technology is already putting the company in a prime position to benefit.

Aptiv's stock is as close to a driverless car pure play as you can get

There's one more company that investors need to know about -- but may not have heard of -- when considering driverless car stocks. Aptiv is a hardware and software company that sells an array of technology to automakers, specifically for advanced driver-assistance systems (ADAS).

ADAS features -- like automatic braking, lane-departure warning, and automatic parking -- are all part of semi-autonomous vehicles and are the building blocks for fully self-driving cars. The company was spun off from Delphi Automotive in early 2018, and the new company now focuses on the electronics and software that make driverless cars possible.

Aptiv recently teamed up with Lyft to launch 30 autonomous vehicles in Las Vegas that can be hailed using Lyft's app and will operate on specific roads around the city. The partnership is part of a multiyear agreement between the two companies, and Aptiv said recently that the deal is a "clear step toward generating revenue for Aptiv's autonomous driving business."

By the end of this year, the company will have about 150 self-driving vehicles on the road across Singapore, Boston, and Las Vegas. Aptiv is also working with other companies to help develop fully autonomous vehicle platforms and is expected to launch a Level 4 driverless car system in collaboration with Intel's MobileEye sometime next year.

Aptiv's CEO Kevin Clark said on the company's recent earnings call that work it's doing for automakers right now on lower-level semi-autonomous systems would soon morph into a business of fully autonomous technology:

The advanced work we're doing today on Level 1, 2 and 3 ADAS systems for our traditional OEM [original equipment manufacturer] customers is being leveraged into Level 4 and Level 5 automated driving solutions for mobility-on-demand providers and vice versa.

What's unique about Aptiv is that it's about as close as you can get to a driverless car pure play right now. The company was purposely created to focus on the next generation of mobility and car connectivity, so it has a lot riding on the success of the autonomous vehicle market.

This market is headed in only one direction

News of autonomous vehicle crashes is sure to spark concern from the public and investors. Self-driving technology isn't perfect yet, and these vehicles are going to need more drive time before they get there. But investors should keep in mind that there's virtually no stopping this technology from taking off now.

When you consider that many mid-priced vehicles are already coming with semi-autonomous features like automatic braking and the ability to keep a car in its lane on the highway, it's easy to see how the public is quickly becoming exposed to these advanced technologies. A decade from now, the current technologies will feel as commonplace as ABS and tire-pressure monitoring systems.

Investors looking for a way to cash in on the driverless car market would be wise to jump in at its current early stage. Because once driverless vehicles start hitting the road en masse -- and they will -- the opportunity to benefit from their rapid rise on public roads may be gone.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Nvidia, and Tesla. The Motley Fool recommends Ford. The Motley Fool has a disclosure policy.