2024 is the year of artificial intelligence. The revolutionary new technology that has disrupted the status quo on Wall Street has managed to shift investor attention away from economic turmoil to a specific set of firms that can benefit from the massive expected enterprise spending on accelerated computing and the associated industries needed to enable this shift. This has meant that despite the fact that interest rates have been at a 23 year high, the flagship S&P index is up by almost 44% since the close of 2022 while the tech heavy broader NASDAQ index has gained 63% during the same time period.
One technology that is part of artificial intelligence is autonomous driving. Autonomous driving, in its simplest form, is built on machine learning. Machine learning is a subset of artificial intelligence, so, autonomous driving is also artificial intelligence - a fact that is often left underappreciated by the broader media and analyst coverage. Autonomous driving uses neural nets to assimilate existing data and predict the behavior of pedestrians and other drivers. This ability offers the potential to create new industries, particularly where car owners provide their vehicles for autonomous ride sharing to earn money when they don't need their vehicles.
According to McKinsey, consumer willingness to rely on shared autonomous vehicles for their trips over trips taken on existing private vehicles has only grown. As an example, its 2022 research showed that 56% of consumers surveyed were willing to use shared autonomous vehicles provided that they did not increase travel time and were at least 20% cheaper compared to their private counterparts. Additionally, 34% of those surveyed wanted level 4 (L4) autonomy in their next vehicle purchase. Autonomous driving is categorized across five levels, with level 1 being simple features such as cruise control and level 5 being a fully autonomous system that does not require any human attention or interaction.
McKinsey estimates that revenue from autonomous ride sharing fleet vehicles such as robotaxis and robo-shuttles could touch $400 billion by 2030, based on statistics such as the German passenger car fleet of 50 million vehicles being parked 95% of the time and offering 250 million seats to meet the entire population's mobility needs.
Building on this, while we'll get to the strides made by Elon Musk's car company on this front later, other car companies have also jumped into the fray. For instance, the second best automotive stock to buy according to hedge funds has teamed up with Goldman Sachs' eighth best hedge fund stock pick through its Cruise business to offer autonomous ride sharing services to customers next year. This will be one of the first robotaxi projects of its kind, and its announcement came months after the Autonomous Vehicle Industry Association (AVIA) had shared its first ever State of AV report. It shared that autonomous vehicles have driven nearly 70 million miles on American roads, with most of these being recent as the number of miles driven had marked a 59% growth since July 2023.
While big ticket car brands typically dominate the autonomous driving conversation, there are several private and small companies that are also 'driving' the mileage for autonomous vehicles so to speak. One such firm is Nuro, which aims to develop L4 logistics vehicles capable of making deliveries. It tests its products in a closed track in Las Vegas, and the firm has driven one million autonomous miles to date. Another firm is Gatik, which has partnered up with the second best hedge fund eCommerce stock pick and also the biggest brick and mortar retailer in the world. It offers autonomous transportation as a service (ATaaS) by operating box trucks that autonomously ship goods within different supply chain nodes such as fulfillment and distribution centers, stores, and warehouses.
Coming back to Elon Musk's car company, autonomous driving and robotaxis are at the center of its valuation, at least as far as RBC Capital and Cathie Wood's Ark Invest are concerned. According to RBC, Robotaxi's revenue can sit at $120 billion in 2040, with the autonomous ride sharing business accounting for 52% of the firm's valuation. Ark, as expected, is more optimistic. Its expected value for the car company's share price is $2,600 in 2029, which will be driven by $8.2 trillion in enterprise value, $1.2 trillion in revenue, and $440 billion in operating income. As per the hedge fund's research, 88%, 63%, and 86% of these values will be driven by Robotaxi.
Since autonomous vehicles require GPUs to train neural networks, and big tech firms' insatiable PGU demand for non-autonomy related AI use cases has made these chips one of the hottest commodities in the world, a shortage in GPUs could impact the projected growth in autonomy. For instance, emails obtained by CNBC in June revealed that Musk had asked his GPU supplier to divert supplies intended for his car company to the social media firm X and AI company xAI. These shipments were worth roughly $500 million, and the latest earnings saw him share that he had no choice but to compete with the world's largest GPU maker.
During the call, Musk outlined that since it was hard to procure the "state-of-the-art" GPUs, " when we want them. And I think this therefore requires that we put a lot more effort on Dojo in order to have — in order to ensure that we’ve got the training capability that we need. So we are going to double down on Dojo, and we do see a path to being competitive with " the GPU company.
Our Methodology
To make our list of the best autonomous driving stocks, we ranked the holdings of Global X's autonomy ETF that are focused on autonomous driving by the percentage of shares outstanding that were sold short and selected the stocks with the lowest percentage.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of a semiconductor component, highlighting its complex design.
NXP Semiconductors N.V. (NASDAQ:NXPI) operates on the hardware side of the autonomy industry. It makes and sells radar processing systems, radar transceivers, safety processors, and system on chip (SoC) packages that are used in ADAS platforms. NXP Semiconductors N.V. (NASDAQ:NXPI) is one of the biggest automotive chip suppliers in the world. Since the semiconductor industry is built on long term partnerships as semiconductor fabrication firms and OEMs work together for chip design, this offers it considerable leverage in capturing chip and related product orders stemming from the growth in autonomous vehicles. Additionally, the semiconductor industry is also capital intensive, which reduces the risk of new entrants threatening to take NXP Semiconductors N.V. (NASDAQ:NXPI)'s business away. However, high exposure to the automotive industry leaves the firm vulnerable to cyclical downtrends and any inventory buildups, despite the fact that NXP Semiconductors N.V. (NASDAQ:NXPI) also operates in the IOT and communications industries.
NXP Semiconductors N.V. (NASDAQ:NXPI) is currently busy managing its inventory as management shared during the Q2 2024 earnings call:
“With that, our quarter 3 guidance assumes approximately 1.8 months of distribution channel inventory. However, we will not grow channel inventory back to anywhere near our long-term target of 2.5 months within this calendar year. As a result, we will continue to stage inventory in a very controlled and targeted manner in the channel. Taken together, the second half will grow over the first half with the potential outcome for 2024 to be a modest annual revenue decline in the low single digit range. This is toward the low end of our earlier expectations because of the more persistent and deep inventory digestion at our auto Tier 1 customers and due to the continued weakness in our core industrial markets in Europe and the Americas. Before turning the call over to Bill, I would like to highlight what I believe is a truly strategic long-term investment for our hybrid manufacturing strategy.”
Overall NXPI ranks 6th on our list of the best autonomous driving stocks to buy according to short sellers. While we acknowledge the potential of NXPI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NXPI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
