Key Questions on the Evolving Future of Transportation

Advancements in self-driving car technology will eventually result in full-scale autonomous transportation. Considering the level of investment from deep-pocketed tech and auto companies and the caliber of human capital that accompanies it, the space has become “too big to fail.” This note explores three key questions we’re working through as we consider the autonomous future:

  • What will an automaker of the future look like?
  • What will the future of transportation look like for consumers?
  • Who is going to win in the future of transportation?

What will an automaker of the future look like?

In order for an automaker to succeed in the transition to autonomy, we see three core competencies: manufacturing capability, autonomous systems, and services.

Manufacturing Technology

Despite all the work going into and the hype around autonomous systems, expertise in manufacturing cars can’t be overlooked. We’ve seen the challenges Tesla has had scaling their production. Technology companies are at a significant deficit here and will likely rely on partnerships with traditional auto to bring a product to market.

Tesla is trying to solve the manufacturing problem on its own. Elon Musk said, “The biggest epiphany I’ve had this year is that what really matters is the machine that builds the machine, the factory, and that this is at least two orders of magnitude harder than the vehicle itself.”

To tackle this problem, Tesla has made acquisitions in the manufacturing space and has chosen to develop software and sensors in-house. We’ve written a lot about Tesla’s efforts (and shortfalls) in manufacturing the Model 3 at scale. We think they’ll get there.

Autonomous Systems

Software is the brains behind autonomous vehicles. This is both the most complex element and where the true value lies in autonomy. The winner in this space will have a good chance at owning the operating system of the car.

A few notable investments in this space: GM’s acquisition of Cruise, Ford’s investment in Argo AI, and Delphi’s acquisition of NuTonomy. Autonomous software investments are typically the largest in the space. We expect this trend to continue as traditional automakers, who already possess manufacturing skill, attempt to acquire or partner with the tech that will keep them relevant as the industry transitions.

Sensors are the eyes and ears of autonomous vehicles. We break the sensor category into LiDAR, radar, and cameras. Most autonomous solutions today require all three, but Tesla thinks it can reach full autonomy without LiDAR.

Many auto manufacturers and tech companies have made hardware acquisitions. Above and below are some of the investments that major auto companies have made in autonomous software and sensor companies:

Services

A significant part of current automakers’ revenue comes from servicing and maintaining the vehicles they have sold. As EV and autonomy play out, and ride-hailing fleets reduce car ownership, these service revenues will need to be replaced by software services. Down the road, connected cars will resemble a platform much like a mobile device. Owning the operating system and/or providing software services through that OS could more than make up for lost maintenance revenue.

One of these services could be in-car entertainment. With steering wheels, and eventually the need for driver attention, going away, the interior of a car will look much different. Seating arrangements and space will not resemble the current layout, but more importantly, we’ll be free to spend our time differently while in transit.

Tech companies will all be vying for the opportunity to provide in-car entertainment to consumers. Similar to smartphones today, there will be those that own the operating system (Apple, Google) and those that build on top of it to deliver content (Netflix, Snapchat). Outside of these opportunities, companies will also leverage the connected car platform to deliver targeted advertisements to riders. Imagine being prompted with a coupon for Starbucks while on your way to work. Companies will be able to target individuals with location-based advertisements much easier than through smartphones.

What will the future of transportation look like for consumers?

There are three themes that will impact what the future of auto will look like for consumers. We’ve written in-depth about these topics here: Auto Outlook and Detroit Auto Show.

Electric Vehicles will be prevalent. Electric vehicles currently account for ~1% of all vehicles today, but will reach 35% by 2030. As battery technology improves, range anxiety decreases for consumers. We’ve also learned that EVs can be fast.

Cars will drive themselves. Today, 99.9% of all vehicles have little to no automation. By 2040, 90% of vehicles sold will have Level 4 or 5 autonomy. Our transportation experience won’t change dramatically until autonomy becomes more prevalent.

Car ownership will decrease, giving way to more ride-hailing. Today, the current household has an average of 2.0 cars. We think that over the next 15-years, this number could go down to 1.25 cars per household and, longer-term, decrease even further. While some individuals may not like the idea of giving up ownership of a vehicle, there are plenty of benefits. For starters, people would not have to pay car insurance, worry about maintenance, store a vehicle, or for those of us in less favorable climates, scrape windows in the winter, or worry about parking during a snow emergency.

As ride-hailing networks become more reliable with autonomous vehicles, more people will be willing to decrease or give up household ownership of vehicles. Traditional auto and tech companies are making large bets on it, as outlined above and below:

Who is going to win in the future of transportation?

If the connected car is a platform like the smartphone, who will be the Apples and Googles of transportation? Waymo, Uber, and Tesla are early candidates for winning the operating system of the car, with each taking their own unique approach. Waymo has focused on building autonomous systems first and will seek to launch or partner with a ride-hailing network second. Uber has built a ride-hailing network first and is now racing to catch up in autonomy. Each will seek to partner with existing car manufacturers for producing vehicles. Tesla decided to manufacture vehicles first and is narrowing in on autonomy second; believing that a ride-hailing network is the last hurdle that needs to take place.

There are plenty of other entrants that could compete in this space including OEMs, who have invested large amounts in autonomy and certainly have the manufacturing scale component already solved, as well as a host of tech companies that could provide autonomous systems or software services to manufacturers. The bottom line is that the value chain in the transportation industry is being disrupted, and the massive opportunity to capture value in an industry transition will create a number of new winners.

At this point, it’s clear that one winner will be the consumer. With access to more ubiquitous, clean, and affordable transportation without the burden of car ownership, mobility will be more accessible than ever.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Nvidia Results: Intoxicating Combination of Faster, More Profitable Growth

What’s new. Shares of NVDA are up 7% after hours as the company reported an intoxicating combination of faster, more profitable growth. What’s new?  Tonight’s results are further evidence of the magnitude of the opportunity ahead of Nvidia. Its products are a foundational part of the future of technology, based on their use in data centers, autonomous vehicles, virtual and augmented reality platforms, cryptocurrency mining, and eSports. We remain believers in the long-term Nvidia story. While shares of NVDA are up 100% over the past year (market cap of $129 billion), we think there’s further upside given Nvidia’s foundational exposure to frontier technologies.

Earnings and model recap. Nvidia reported Dec-17 revenues of $2.9B vs. Street at $2.7B (up 34% y/y), and EPS of $1.72 vs. Street at $1.16. Updated model here.

Pole position in three green field growth markets: As we’ve written about previously, gaming, datacenter, and automotive, all have open-ended growth opportunities.

1. Gaming

Nvidia’s gaming business revenue was $1.74B, up 29% y/y. This was driven by high-quality, hit games in the market, notably PlayerUnknown’s Battlegrounds (PubG), Destiny 2, Call of Duty WWII, and Star Wars Battlefront II. PubG has reached 30 million players in 9 months, two months faster than Activision’s Overwatch. It’s worth noting the new Overwatch league launched last month and recorded 10 million unique users in its first week. The success of these games is leading to both an increase in the number of GPUs sold, as well as ASPs for Nvidia.

Additionally, demand for GPUs for cryptocurrency mining has boosted Nvidia’s gaming segment results. The rise in cryptocurrency demand has contributed to historically low channel inventory levels of GPUs being reported.

Long-term, the outlook for gaming remains promising.

I’ve always believed that the video game market is going to be literally everyone. In 10-years’ time, 15-years’ time there’s going to be another billion people on earth. And those people are going to be gamers. Not to mention that, almost every single sport could be a virtual-reality sport. – Jensen Huang

Part of the upbeat guidance for the April quarter is because gaming channel inventory is at historically low levels and the company expects to fill channel inventory during the quarter.

2. Datacenter

Nvidia’s datacenter revenues were $606M, up 105% y/y. For the 7th consecutive quarter, Nvidia’s datacenter revenues saw three-digit growth.

Driving datacenter growth are investments in artificial intelligence from a broad range of companies. Nvidia commented on the earnings call that every major cloud provider, including Alibaba, Amazon, Baidu, Google, IBM, Microsoft, Oracle, and Tencent have adopted Nvidia’s Tesla V100 GPUs for training deep learning networks.

We’re in the early innings artificial intelligence and just as all companies evolved to be internet companies in the early 2000s and mobile companies in the late 2000s, they will soon evolve to be AI companies.

3. Automotive

Nvidia’s automotive revenue was $132M, up 3% y/y. Despite little growth, remains Nvidia’s biggest opportunity. On tonight’s call, Jensen Huang outlined three near-term opportunities in Automotive:

  1. Nvidia’s DGX system is used to train neural networks for autonomous driving at data centers.
  2. Nvidia’s DRIVE PX platform provides cars with the necessary on-board computing strength for autonomous capabilities.
  3. Nvidia is reaching development agreements with major OEMs, ride-hailing companies, startups, tech companies, and many others to support their efforts in autonomy. Each project is engineering intensive, and companies rely on Nvidia for help.

Longer-term, the market for autonomous vehicles will be larger than most people think. Today, automotive accounts for 6% of revenue, and we expect it to rise to 13% by 2023. As we outlined in our Auto Outlook 2040, we expect 90% of vehicles on the road in 2040 to have level 4 or 5 automation, which would require a platform such as Nvidia’s DRIVE PX. 

Transportation is a $10 trillion industry. Between cars and shuttles and buses, delivery vehicles, I mean, it’s just an extraordinary, extraordinary market. Everything that’s going to move in the future will be autonomous. – Jensen Huang

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Tesla Earnings: Continue to Wait… and Believe

Conclusion. Our confidence in Tesla’s ability to capitalize on the EV and autonomy opportunity remains unchanged. Our perspective that reaching this EV and autonomous future will take longer than most think, but be bigger than most think also remains unchanged.

Musk commented that Tesla will, “Productize the factory,” adding, “anyone could have made that car (Model T), but not anyone could make River Rouge (Model T production line).”

Updating our Model 3 thinking. We are factoring in comments from Tesla’s Q4’17 Update Letter that call for an increase in capex largely related to retooling for the Model 3 ramp. The company added on the earnings call that part of this capex spend will include, “significant investment in our required up front for the next phase of Model 3 production… Way more than 50% (of the capex) is the Model 3.” We believe retooling could cause a temporary step down in production in the fall of 2018, and as a result, are lowering our Model 3 production target to 168,400 from 182,000. Our revised numbers are in line with Street estimates as of yesterday’s close. Our weekly Model 3 production number exiting 2018 remains unchanged at 7,150 vehicles. Importantly, our 2019-2023 Model 3 numbers remain unchanged.

Link to model here.

Autonomy. One new insight from the earnings call was Musk’s commentary into why Tesla’s vision suite (camera, radar, and ultrasonic sensors) should eliminate the need for LiDAR. The dumbed-down version is Musk believes in taking the “hard path” and using a sophisticated neural net to solve passive object identification with cameras instead of using lidar as a “crutch.” In the long run, he believes this path will not only cost less and look better, but will produce a superior system capable of seeing through rain and sleet, and performing in more complex situations. This is important given that if Tesla is successful in using its vision suite instead of LiDAR, every Tesla produced today will be upgradable to full autonomy with a software update, which would catapult the company into the lead position in the race to autonomy.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Google Stays Focused on AI Theme

AI-First. We start with artificial intelligence, as Sundar has done the last five consecutive quarters. He continues to make it more than apparent that AI is essential to Google’s vision and will be a key component of their products and services. AI topics like Google Assistant, Waymo, AutoML, and AI-first hardware were highlighted on the call, but financial metrics like TAC overshadowed. Here is a look at Sundar’s opening remarks of the last five earnings calls.

  • Dec-17 (today) – “Thanks, Ruth. Our teams are off to a great start in 2018 (omitting 6 lines) Technology is an incredibly dynamic industry. We have been laying a foundation for the next decade as we pivot to an AI first company powering the next generation of Google products like the Google Assistant.”
  • Sept-17 – “Thank you, Ruth. We had another great quarter. (omitting 1 line) Even though we are in the early days of AI, we are already rethinking how to build products around machine learning. It’s a new paradigm compared to mobile first software, and I’m thrilled how Google is leading the way.”
  • Jun-17 – “Thanks, Ruth. We had a phenomenal quarter. Google continues to lead the shift to AI-driven computing.”
  • Mar-17 – “Thanks, Ruth. It’s been a terrific start to the year. (omitting 10 lines) Now, turning first to machine learning and access to information. I’m really happy with how we are transitioning to an AI-first company.”
  • Dec-16 – “Thanks, Ruth. 2016 was a great year for Google and 2017 is shaping up to be even more exciting. (omitting 11 lines) First, machine learning and access to information. As I’ve shared before, computing is moving from a mobile­first to AI­-first with more universal, ambient and intelligent computing that you can interact with naturally, all made smarter by the progress we are making with machine learning.”

Cloud. Google’s cloud business is gaining momentum as the world’s fastest-growing major public cloud provider. It is now a $1B per quarter business, but it still dwarfed by AWS revenue of over $5B per quarter. Sundar says the momentum is coming from their efforts to be enterprise scale ready. “Now we can handle any type of enterprise,” he says. We expect Google’s Cloud business to continue this growth in market share.

Hardware. As the largest contributor to “other revenue,” and with 2000 new HTC engineers, hardware is becoming increasingly important to Google. Hardware shipments “doubled” this quarter which means sales of Google Home and Pixel 2 have been strong. Further, when asked about monetizing the voice platform around Google Home, Sundar said they will remain focused on the user experience rather than monetization for “some time.” This means we can expect an ad-free experience for the foreseeable future. We think Google Home’s superior AI will lead it to steal market share from Alexa in the coming years.

Waymo. Waymo was brought up several times, but details about the recent order for vehicles from Fiat Chrysler and timing on fleet deployment were danced around. Nonetheless, the excitement from Ruth, Sundar, and analysts was palpable. We expect Waymo to be the first to bring a widespread fleet online and will be tuning in to see how early deployments play out in Phoenix.

Buzzword Bingo. Over the same five quarters, we tracked how many times presenters and analysts made comments artificial intelligence by tallying instances of AI jargon (AI, artificial intelligence, machine learning, TensorFlow, natural language processing, etc).  This is evidence of the intensity level at which Google is pursuing AI.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Detroit Auto Show: Winners and Losers in an Industry Transition

We spent two days at the Detroit Auto Show to experience for ourselves the role that Motor City is playing in the future of mobility. Here are the takeaways:

  • OEMs: Detroit won’t be left behind as traditional auto is consumed by tech. OEMs will continue to acquire or partner with the innovation that will keep them relevant. However, the pace of change would quicken if they would end their obsession with model years and incremental, annual updates and focus on wholesale changes to their business.
  • Fleet headwind. As transportation consumption shifts to fleets, consumers will buy fewer cars and fleets will buy more. We believe this will result in a 2% annual unit sales headwind over the next 15 years.
  • Suppliers: Internal combustion engine (ICE) part suppliers are in a tough spot as the industry shifts from 1% EV today to 35% by 2030 (Source: Loup Ventures Auto Outlook 2040).
  • Dealers: While dealers had a less visible role at the show, it’s clear that autonomous fleets will force dealers to rethink their business model from the ground up.
  • Timing: There’s more that goes into autonomy than technology. We are still 3-5 years away from large-scale deployments of autonomous mobility fleets due to the complex web of players that must eventually cooperate. We expect consumer purchases of fully autonomous vehicles to be 5+ years away.

Old school Detroit out in force. While CES presented a view of what’s to come in car-tech, much of the hype in Detroit can best be described as old school Detroit. The show focused on near-term matters like new trucks from Chevrolet, Ram, and Ford, a new hybrid from Honda, and incremental improvements in features. The vast majority of the crowds in the Cobo center were there from automakers, suppliers, and dealers, dressed in suits, there to do business the same way they have since the 80s.

New school Automation growth. The lower level of the show featured the tech-focused Automobili-D, which was full of startups, investors, and universities looking to disrupt the industry responsible for the gathering. Automobili-D, which debuted last year, has already more than doubled in size – a trend we expect to continue as new technology leads the industry’s transition.

Detroit’s industrial complex. President Dwight Eisenhower’s concept of the military-industrial complex (MIC) can be applied to the auto industry. MIC is is an informal alliance between a nation’s military and its suppliers, and those groups work together to influence policy.  MIC-like behavior has been in place in the auto industry since in the 1930’s, which, based on our observations, continues today. So, change will happen slowly with traditional auto, despite recent announcements of heavy investment in the future. Ford announced an expansion of their investment in EVs to $11B from $4.4B and 40 electrified models by 2022, and GM announced plans to build Bolt EV sedans without pedals or steering wheels at scale by the end of next year. These investments represent large bets that should reshape the industry, but the sense at the Detroit Auto Show is that autonomy may be further away than we imagine.

OEMs will play an important part in the future of transportation. It quickly becomes apparent that innovation without the support of major automakers can only go so far. Nearly every startup we talked to was shooting for deals with OEMs or a regulation that will ensure that compatible technology is integrated into all cars coming off assembly lines. Because of their size, history, and longstanding relationships with regulators, OEMs will be the ones to influence legislation or be trusted to perform large-scale tests of new technology. Even the big self-driving players will rely on traditional auto evidenced by Waymo’s deal with Fiat Chrysler and Uber’s relationship with Volvo.

Winners and losers to Detroit’s evolving approach? Traditional OEM’s model will evolve towards fleets, software, and transportation as a service. This means the trend of auto working with tech will continue. We see OEMs evolving away from their legacy supplier relationships and away from the dealer model.  As fleets become more prevalent and individual car ownership declines, so does revenue from new car sales and the subsequent service of those cars. Electric and autonomous vehicles will more resemble a rolling datacenter than a traditional ICE vehicle, so suppliers and dealers will also be under pressure. One opportunity for OEMs lies in transitioning their services from maintaining cars, a hardware business, to owning the future of in-car services like entertainment, a software business. Today, Tesla is the only vertically integrated automaker that is well positioned to take market share away from OEMs given the trends we see in auto. Their absence in Detroit is apparent as they continue to push against the traditional nature of Motor City.

The fleet headwind. As transportation consumption shifts to fleets, OEM’s will sell fewer cars to consumers and sell more cars to fleets. The net of these two trends will be a reduction in vehicles sold, given utilization per vehicle will increase. To illustrate: the average household in the U.S. has 2.0 cars today. If that trends to 1.25 car per household over the next 15 years, that implies about 5m fewer vehicles sold per year in the U.S, resulting in an annual 3% decline in auto sales. Factoring in an increase in sales to fleets should yield a net annual industry vehicle production decline of closer to 2%.

We’re 90% of the way there, but the last 10% is really hard. We continue to stress that our transition to autonomous and electric mobility will take longer, but be more impactful that most of us imagine.

Our transition to autonomous and electric mobility will take longer, but be more impactful that most of us imagine.

It’s easy to imagine a driverless future where there are no accidents, traffic, or stoplights, and everything works seamlessly, but it’s impossible to predict each individual step it will take to get there. Outfitting a car with the proper sensors and building the decision-making software is one piece of the puzzle, but widespread adoption of these technologies will require significant investment and cooperation between countless actors. Young startups, century-old automakers, established hardware and software providers, regulatory bodies from federal to municipal levels, infrastructure contractors, and most of all, drivers, will all need to be on the same page. Today, most of our collective attention is focused on designing cars and their accompanying sensors and software, but other elements like V2X communication, smart city infrastructure, and fleet management must also be considered.

Spending time at Automobili-D revealed the level of effort that is being devoted to each step along the way like interaction with emergency responder vehicles, predictive collision avoidance software, making cars drive more like humans, or simply cleaning off cameras and sensors in inclement weather. We have built cars that can successfully navigate public streets autonomously, but the road to mass adoption is still long. We may be 90% of the way there, but the last 10% may take 5+ years to achieve.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.