I've just done some reading (some 1/2 year old - pretty ancient) on Autonomous Vehicles and it prompted me to reaffirm a few points, I already thought are true, but perhaps have not stated clearly here yet.
Integration
Waymo had and maybe still has a lead in software, but this is far from enough to succeed. My favorite GM lacks some of Waymo's advantages (Google Maps, both for data and for demand generation), but compensates for this and then some by being fully integrated.
This post from GM Cruise CEO explains clearly why being able to retrofit hundreds of cars with self driving capability is so much different than building millions of cars on a proper assembly line. The former is nice, but only with the latter one can build a sustainable business.
What it also shows and I did not appreciate enough earlier, is that GM will have a huge cost advantage in building AVs compared to virtually everybody else. Waymo's deal with Chrysler for 62k cars surely will require similar assembly-plant integration, but fear of IP ownership and haggling on R&D and Capex costs will surely slow them down and make for an inferior process.
I think alleged Larry Page's decision to not front costs for Ford to do deep integration will be one of the biggest lost opportunities out there. I admire him in general, but being slow in bringing Waymo to market will probably make a difference between winning and loosing this huge market. Hell, Google should have bought Ford, GM or even Magna Steyr to enable rapid commercialization.
I don't believe working with auto OEMs at arm's length (Android model) will work for what's ultimately a complex integration between: base auto, self-driving hardware and self-driving software.
Development and deployment choice
Furthermore, by launching first in Arizona, Waymo seems to optimize for safety, rather than for business scale. Another post from Kyle Vogt shows GM's advantage in pace of learning, and it's hard for me to imagine that Cruise will not catch or overtake Waymo in software capability soon, or it hasn't already.
Waymo being first to launch will be a pyrrhic victory, as it will just pave the way for more scaled competition, probably GM. They will join Tesla and Uber in being 'first' (in having 'autopilot' and by having their self driving car causing first death - respectively). But it will not ultimately matter.
GM stock, catalysts and option pricing
It's another story when the market will catch-up with the opportunity and what will be the catalyst of realizing GM's value. I can see a few potential moments for that, with varying degree of uncertainty:
1) Waymo launching commercial service this year
2) Alphabet reporting a jump in 'Other' revenues in some quarter, attributable to Waymo
3) GM launching a beta test with the public, or another major partnership or actual vehicle production number.
4) GM launching actual service to the public sometime in 2019
Based on that, I'm inclined to buy a substantial amount of far out-of-the-money options for GM. The relative weakness and low volatility of the stock makes for a great risk-reward ratio, and while I do have some OOM options already, the time is ripe to buy much more to get leverage with little downside. I want to get the timing right, though, as time decay is simply costly, and GM has fallen after their AV announcement late last year, and can easily fall between latest SoftBank announcement and the time they actually deploy the fleet. This would provide an even better entry point.
I believe that while widely accepted, the Black-Scholes option pricing model can really fall down when dealing with real world, and Warren Buffett noted in his 2008 letter.
In this case, I think judging range of potential future prices of GM stock based purely on it's past volatility and not taking into account optionality (sic!) provided by Cruise is just wrong. It will allow me to profit at the cost of option sellers relying blindly on the model.
Of course one will argue that this optionality is already priced into GM stock. But a rational value analysis disproves that notion - GM is dirt cheap, even if it had no Cruise.
By the way - there's another interesting angle to GM - according to this site, it will likely surpass 200k US deliveries of plug-in vehicles later this year. This kicks-off a phase out period (which might be removed). In a few quarters of the phase out, GM could potentially deliver to Cruise tens or hundreds of thousands of vehicle, while still ripping off (partial) tax credit for them.
Integration
Waymo had and maybe still has a lead in software, but this is far from enough to succeed. My favorite GM lacks some of Waymo's advantages (Google Maps, both for data and for demand generation), but compensates for this and then some by being fully integrated.
This post from GM Cruise CEO explains clearly why being able to retrofit hundreds of cars with self driving capability is so much different than building millions of cars on a proper assembly line. The former is nice, but only with the latter one can build a sustainable business.
What it also shows and I did not appreciate enough earlier, is that GM will have a huge cost advantage in building AVs compared to virtually everybody else. Waymo's deal with Chrysler for 62k cars surely will require similar assembly-plant integration, but fear of IP ownership and haggling on R&D and Capex costs will surely slow them down and make for an inferior process.
I think alleged Larry Page's decision to not front costs for Ford to do deep integration will be one of the biggest lost opportunities out there. I admire him in general, but being slow in bringing Waymo to market will probably make a difference between winning and loosing this huge market. Hell, Google should have bought Ford, GM or even Magna Steyr to enable rapid commercialization.
I don't believe working with auto OEMs at arm's length (Android model) will work for what's ultimately a complex integration between: base auto, self-driving hardware and self-driving software.
Development and deployment choice
Furthermore, by launching first in Arizona, Waymo seems to optimize for safety, rather than for business scale. Another post from Kyle Vogt shows GM's advantage in pace of learning, and it's hard for me to imagine that Cruise will not catch or overtake Waymo in software capability soon, or it hasn't already.
Waymo being first to launch will be a pyrrhic victory, as it will just pave the way for more scaled competition, probably GM. They will join Tesla and Uber in being 'first' (in having 'autopilot' and by having their self driving car causing first death - respectively). But it will not ultimately matter.
GM stock, catalysts and option pricing
It's another story when the market will catch-up with the opportunity and what will be the catalyst of realizing GM's value. I can see a few potential moments for that, with varying degree of uncertainty:
1) Waymo launching commercial service this year
2) Alphabet reporting a jump in 'Other' revenues in some quarter, attributable to Waymo
3) GM launching a beta test with the public, or another major partnership or actual vehicle production number.
4) GM launching actual service to the public sometime in 2019
Based on that, I'm inclined to buy a substantial amount of far out-of-the-money options for GM. The relative weakness and low volatility of the stock makes for a great risk-reward ratio, and while I do have some OOM options already, the time is ripe to buy much more to get leverage with little downside. I want to get the timing right, though, as time decay is simply costly, and GM has fallen after their AV announcement late last year, and can easily fall between latest SoftBank announcement and the time they actually deploy the fleet. This would provide an even better entry point.
I believe that while widely accepted, the Black-Scholes option pricing model can really fall down when dealing with real world, and Warren Buffett noted in his 2008 letter.
In this case, I think judging range of potential future prices of GM stock based purely on it's past volatility and not taking into account optionality (sic!) provided by Cruise is just wrong. It will allow me to profit at the cost of option sellers relying blindly on the model.
Of course one will argue that this optionality is already priced into GM stock. But a rational value analysis disproves that notion - GM is dirt cheap, even if it had no Cruise.
By the way - there's another interesting angle to GM - according to this site, it will likely surpass 200k US deliveries of plug-in vehicles later this year. This kicks-off a phase out period (which might be removed). In a few quarters of the phase out, GM could potentially deliver to Cruise tens or hundreds of thousands of vehicle, while still ripping off (partial) tax credit for them.
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