This Non-Automaker Will Make $12.7 Billion From Self-Driving Cars

A couple of weeks ago, I attended a food and wine festival in midtown Miami. During the event, automaker Tesla previewed a couple of its new cars.

That’s how I got a chance to see the new Model X.

The Falcon Wing doors reminded me of the old DeLorean. The seats adjusted to my body for perfect comfort.

And the navigation system looked like something from the U.S.S. Enterprise.

Sensing my excitement, the rep went in for the sale…

“All new Teslas have full self-driving capability. We’re just waiting for the regulators to allow us to turn it on,” he told me.

What he didn’t realize was that I wasn’t in the market to spend over $90,000 on a car… I was there to check out the technology inside the car.

And this technology will allow the car to drive itself better than any human ever could. It includes…

• Eight surround-view cameras that provide 360 degrees of visibility around the car with a range of up to 250 meters.

• Twelve ultrasonic sensors that complement this vision. This allows the car to detect objects at nearly twice the distance as the cameras.

• A forward-facing radar with enhanced processing that provides additional data. It uses sensors that can see through rain, fog, dust, and even the car ahead.

There’s one company that makes the electronic “brains” that power self-driving cars like the Tesla Model X.

The Road to the Future

As you can see in the above video, self-driving cars (also called “autonomous vehicles”) are a reality today.

The only thing we’re waiting on is for lawmakers to make them legal to operate on the road.

Some states and cities already allow self-driving cars on their roads. But what automakers need is national legislation.

In September, the U.S. House unanimously passed a bill that would bring self-driving cars to the market much faster. A similar bill is now in the Senate.

Now, we don’t know whether the Tesla Model X will take over streets of the future when Congress passes this law.

(Regular readers know that I’m no fan of Tesla’s stock. It’s priced on hopes, dreams, and unrealistic production targets.)

We do know autonomous cars will be a major part of our future… And that’s good news for one company I’ll tell you about in a moment.

To capitalize off this trend, most investors will be tempted to buy self-driving carmakers. But the safer way to play this trend is to buy the companies that make the technology that goes into self-driving cars.

Before I get to that, let me show you why the autonomous vehicle trend is taking off…

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The Self-Driving Trend Is About to Take Off

Bob Lutz is a 46-year veteran of the automotive industry. He’s worked with several car companies, including General Motors, where he was vice chairman.

Not many people know more about cars than Lutz. This is what he wrote in the November 5 issue of Automotive News:

We are approaching the end of the automotive era… In 15 to 20 years, at the latest, human-driven vehicles will be legislated off the highways.

And studies back him up.

The Boston Consulting Group is a premier consulting firm. It projects autonomous vehicles will make up 25% of the global car market by 2035.

Like we said, we’re not going to try to guess which carmaker will make the best self-driving car 10 or 20 years down the road.

Instead, we want to find the companies that provide the cameras, sensors, and radars for self-driving cars… no matter who makes them.

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The Maker of “Robot Brains”

One of the biggest players in this space is Nvidia (NVDA).

It makes the Drive PX 2 computing platform. The computer uses the car’s cameras as “eyes” and processes the data for the car’s “brain” to make decisions.

And according to road tests, the computer is already a better driver than humans.

The Drive PX 2 can process data from multiple sensors in real time. And that provides 360-degree detection of lanes, vehicles, pedestrians, signs, and more.

Basically, it’s like driving on autopilot.

According to Nvidia, 145 companies already use its Drive PX platform. Some names you may recognize are Toyota, Audi, Tesla, Mercedes-Benz, Volvo, Honda, and BMW.

And with over 5,000 patents protecting its intellectual property, it’s unlikely anyone will overtake Nvidia in this space.

It will be the “brains” inside millions, if not billions, of autonomous cars.

Nvidia’s Sales Are About to Explode

Last year, Nvidia’s automotive segment pulled in $320 million in sales. While that’s only 5% of its sales, there’s plenty of room to grow.

Investment bank Goldman Sachs predicts car companies will sell 112 million vehicles in 2025. Nvidia’s automotive partners control about 35% of this market.

By my calculations, if just 13% of those new cars are autonomous, Nvidia will supply 5.1 million cars with its chips.

This year, Nvidia sold its system to original equipment manufacturers for $15,000 per unit. To be conservative, let’s say Nvidia gets just $2,500 per unit. (The cost of technology decreases over time.)

If Nvidia equips 5.1 million cars with its $2,500 unit, that’s $12.7 billion in sales. That’s almost double Nvidia’s total revenues last year.

We could see Nvidia’s auto segment multiply 40 times over the next eight years.

We’re up 504% since Palm Beach Letter editor Teeka Tiwari added Nvidia to his portfolio in December 2015. However, it’s now above our buy-up-to price.

But this is a company you should definitely keep on your radar.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

P.S. Self-driving vehicles are the future. Do you plan to buy one within the next year or two? Why or why not? We want to hear your thoughts right here…

Beware of Bonds

Bonds are riskier now than at any point in the past 20 years…

Most investors have more bond exposure than they realize.

Even if you don’t own any individual bonds, your 401(k) plan, mutual fund, or pension plan probably does. And if you have a financial advisor, there’s a good chance he has 40% of your portfolio invested in bonds.

That’s why following bond risk is so important. Let me explain…

Fixed-income investors look to one number to judge how risky bonds are—it’s called duration. Duration tells you how far the price in bonds will fall if interest rates go up 1%.

Right now, duration is at 7.2.

That means if interest rates go up just 1%, bond prices will fall 7.2%. As you can see in the chart below, this is the highest level in the past two decades.

Beware… With duration at its highest level in decades, your bond portfolio will plummet if interest rates rise.

—Nick Rokke

Like we said above, the United States is about to see a huge shift in the way we drive. Within the next two years, we’ll see 10 million of these types of cars on the roads. That’s a 49,000% increase from today. Learn more right here…