Last week, investors received a welcome breakfast surprise. Mobileye (NYSE: MBLY) was up 30%.
Intel, the mega chip company, decided to buy Mobileye, a car sensor developer, in a $15 billion deal, causing big gains quickly.
The thing is, if you look behind Intel’s decision to buy Mobileye, you’ll see a theme that I’ve been telling you about for some time – self-driving, or autonomous, cars – which is a critical component of the Internet of Things mega trend that is unfolding right now. And as you can see, it’s making people huge amounts of money quickly.
Now, there are two developments related to the self-driving car theme that have equal potential and are also happening right now.
Rise of the Machines
You see, the car is morphing from a mechanical machine, meaning that it’s driven by things like pistons and gears, to one that is electronic. Second, the car is developing into a machine that is connected to the Internet all the time, and because of that, connectivity is something that can be used as a shared resource.
Related to these things is the fact that because of laws that have been passed around the world, virtually all carmakers are preparing for most cars to be electric.
So, in other words, the entire way of making a car is going to be uprooted and changed.
This means it’s a time of incredible opportunity and, equally, of tremendous risk.
For sure, companies that make the components that are going to go into this electronic, connected, shareable and eventually electric car are going to benefit.
And the companies that hang back, betting on mechanical, unconnected, unshareable and fuel-driven cars, are going to go bust.
The Model of the Future
The key moment, I believe, is coming later this year when Tesla releases its Model 3 car.
The reason why I believe that Tesla’s Model 3 is the key is because it’s going to be the first car that has virtually all the things that I mentioned. It’s electric, filled with electronic components instead of mechanical ones, and has the latest in self-driving capabilities. Model 3, like all of Tesla’s cars, is connected to the Internet nonstop.
According to news reports, over 400,000 people have reserved a Model 3. Now, remember that these reservations are high-commitment: You had to put down $1,000 to do it. And the list price is $35,000.
When you do the math, it means Model 3 is setting up to be a $14 billion product right off the bat.
Now, $14 billion seems like a lot, but it’s nothing compared to the $147 billion that General Motors is expected to generate in sales in 2017.
So, in terms of overall car sales, Model 3 sales are a drop in the ocean.
The Race Is On
The real thing that investors are going to be blown away by is how profitable Model 3 will be compared to the mechanical, fuel-driven cars. That’s because, other than the battery, components like the ones in your computer are much cheaper than the mechanical ones that go into your car.
And when investors see this, all hell will break loose. You’ll see the stocks of some electronic-component makers soar and the stocks of mechanical car manufacturers and their suppliers plummet.
I believe that deals such as Intel buying Mobileye, GM buying self-driving car startup Cruise Automation for over $1 billion in March 2016 and Ford buying a similar startup, Argo AI, for $1 billion, as well as other events with Google and Uber, are all due to the fact that the starting gun for the race to dominate the electronic, electric, connected, shareable and self-driving car is about to go off. And people are expecting the race to be hotly contested between tech companies such as Google and Intel, and car companies such as GM, Ford, Tesla and others.
However, I believe the smart bet on this new kind of car is an investment in the electronic guts of the car. And I still believe that. You can get exposure to many of the companies that make these electronic guts by buying the VanEck Vectors Semiconductor ETF (NYSE Arca: SMH).
