Should You Sell GM?

General Motors' (GM) stock price rose nearly 20% in less than one month.

GM data by YCharts

The company's stock outperformed all of its peers, including Tesla (TSLA), not only during the one-month period presented in the above and below graphs but also in the last three and six months as well.

GM data by YCharts

What Happened?

In my article, Why Is GM Outperforming Ford?, published in September, I explored in detail the crucial difference between General Motors' and Ford's (F) strategies and provided three reasons why GM's stock is substantially outperforming that of Ford. I won't regurgitate that discussion here, but I recommend that you read Why Is GM Outperforming Ford? as a prelude to this article.

News

The following positive news came out since GM's stock started outperforming competitors in the third week of September:

Readers should note that the vast majority of recent positive news listed above relate to GM's efforts around fully autonomous driving.

Does GM Have A Lead In autonomous driving?

I'm not a technical expert on the subject, but the following is what I observe:

On October 6, GM's director of autonomous vehicle integration, Scott Miller, said the following regarding Elon Musk's claims on the subject:

I think he's full of crap.

According to the article at The Sydney Morning Herald, Scott Miller also said that fully autonomous driving is not physically possible with only cameras and radar, which is Tesla's strategy, and that a fully autonomous vehicle available for consumers to buy, could be 10 to 15 years away, which is in stark contrast to the timeline Elon Musk predicted recently at TED:

Chris Anderson: So leaving aside regulation for a second, in terms of the technology alone, the time when someone will be able to buy one of your cars and literally just take the hands off the wheel and go to sleep and wake up and find that they've arrived, how far away is that, to do that safely?

Elon Musk: I think that's about two years.

Either Scott Miller or Elon Musk is very wrong.

Let's Ask Nvidia

Nvidia (NVDA) recently announced it new computing platform, codenamed Pegasus, could be used to power Level 5 fully driverless cars without steering wheels, pedals, or mirrors.

According to an AnandTech article, Pegasus development kits will be available for select automotive partners in 2H18, and given the long testing and validation cycles in the automotive industry, Drive PX Pegasus may not show up in vehicles for several more years.

In other words, Nvidia is playing Switzerland between Scott Miller and Elon Musk.

Three Key Considerations

Many, including myself, believe that the hardware required for fully autonomous driving will at some point be commoditized. It's possible that Nvidia will supply the automotive industry with the necessary computing power, but software is another question.

Hardware vs. Software

Even if the hardware is commoditized, my understanding is that the software challenge is the key part. I'd like to note, again, Alan Kay's famous words that Steve Jobs quoted when he introduced the world to the iPhone in 2007:

People who are really serious about software should make their own hardware.

Tesla and GM are both working on building their own hardware while developing their own software, but the next step is also important.

Data

Vast amount of data is required to train artificial neural networks. This is true for most, if not all, narrow artificial intelligence quests.

Today, Tesla likely has close to 100,000 cars on the road that are equipped with "full self-driving hardware" and that are reportedly feeding the company with gobbles of data.

In other words, Tesla is the only company that is building its own hardware and software while also collecting millions of miles of data per day from its existing fleet.

Fleet Size

Since software is the crucial part of the autonomous driving challenge, and since billions of miles of data are required to solve this problem, getting as many cars equipped with the necessary hardware on the road to accumulate the required data as quickly as possible is critical.

Tesla today has nearly 100,000 cars on the road continuously collecting data, and with the ongoing production ramp of the Model 3, this number will grow substantially in 2018.

GM, on the other hand, just completed the production of 130 autonomous Bolt's in June, and the company just claimed to be ready to mass produce self-driving Bolts. Reuters earlier in 2017 reported that GM was planning to test thousands of self-driving Bolts in 2018 in partnership with Lyft (LYFT).

What Does This All Mean For GM?

Deutsche Bank analyst Rod Lache on September 25 wrote to clients:

GM's autonomous vehicles will be ready for commercial deployment, without human drivers, much sooner than widely expected (within quarters, not years), and potentially years ahead of competitors.

Given that the GM's own director of autonomous vehicle integration, Scott Miller, said that a fully autonomous vehicle available for consumers to buy could be 10 to 15 years away, I suspect that the analyst meant that a limited number GM's own fleet of autonomous vehicles may be used to transport people on predetermined routes, possibly by early 2019. In line with my expectation, this Federal Communications Commission confidentiality request from GM states:

The duration of the entire experimental license shall cover the time until the market introduction, which is January 2019.

Also in line with my hypothesis, Cruise Automation CEO and founder, Kyle Vogt, recently said that these cars will be a part of a fleet that carries Cruise employees anywhere in San Francisco, and added that, "for now," the cars will have humans behind the wheel.

Investor Takeaways

OK. That was a lot of information, so let's bring it all together. The following is a summary of how I expect the future to pan out:

  • Nvidia will play an important role in a fully autonomous future, but the hardware will likely be commoditized in the coming years;
  • Software will be the critical component, so the ability to attract software and artificial intelligence engineers will be an important competitive advantage for some companies;
  • GM will test its own fleet of all-electric Bolt's throughout 2018, and it will introduce an autonomous ride-sharing service in early 2019;
  • Tesla has a lead by having already collected billions of miles of data, which is at least three orders of magnitude higher than its competitors, and Tesla's lead is increasing at a rate of millions of miles each day; and
  • Although Tesla and GM may have a lead on others, Level 5 autonomy will ultimately be incorporated in all new cars, so I do not expect this to be a durable competitive advantage.

Risks To My Analysis

First, there is always a risk of a Silicon Valley maverick suddenly coming out of stealth mode. George Hotz's comma.ai, for example, made the rounds in early 2016 with a potentially low-cost solution to Level 5 autonomous driving. If a start-up somehow solves the problem without needing to accumulate billions of miles of data, this would be detrimental to players that have built an advantage on that front.

Second, GM has manufactured millions of cars per year for decades, and manufacturing is an area that Tesla is looking to catch up. Readers should note, however, that Tesla already has improved its build quality substantially, as I argued in my recent article Tesla's Warranty Expense And What It Means To Its Future. If Tesla cannot continue to quickly improve on this front, GM and other automakers have a chance to catch up more quickly than expected, especially on the autonomous driving front.

Bottom Line

We live in an interesting period in the global automotive industry, which is a multi-trillion dollar opportunity as I recently presented to Tesla Forum subscribers in Tesla Automotive: Total Addressable Value.

The significance of this opportunity is evidenced by the surge in GM's stock price over the last month as soon as two analysts deemed GM a leading contender on this front. Although Tesla enjoys other competitive advantages, this is an area that investors should watch closely.

Readers should take my analysis with a grain of salt, as I've been a long-term Tesla investor for some time. But my interpretation of the limited available data is that GM will not be able to catch up to Tesla quickly enough, even though it may have a lead over other automakers. Because of this, combined with Tesla's ability to mass-manufacture batteries at its Gigafactory, as well as the recent 20% run-up in GM's stock price, I rate GM a SELL.

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Disclosure: I am/we are long TSLA.

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.

Source : https://seekingalpha.com/article/4113800-sell-gm

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