Google may have revealed the future of motoring this week.
The company’s driverless car doesn’t have a steering wheel or any pedals. But it has plenty of sensors that can ‘see’ ahead for several hundred metres. And it’s been successfully tested over 700,000 miles of ‘real world’ driving.
As a lover of all things tech, I’m excited. This could end up revolutionising transport.
But as a Google (Nasdaq:GOOGL) shareholder, I’m a little nervous…
Google is a great advertising company – but can it be a great car manufacturer?
I like Google as an investment because it has a dominant position in internet advertising. I suspect that won’t change. As I wrote in January, Google offers a fantastic service to advertisers and the web advertising market is still growing.
As for the valuation, it’s one of the few high-profile tech stocks that trades at a reasonable price. You can currently buy into this growth story on a price/earnings ratio of just 16. What’s not to like?
Well, this is where the whole ‘driverless car’ business comes in. You can read up on the details in this piece from my colleague Ben Judge. But basically it’s the next step in Google’s project to entirely automate the driving process.
Sure, this may prove a huge success. And if that happens, Google may end up being the best investment I’ve ever made.
But we’re a long way from that point. A lot can go wrong.
Research and development (R&D) for new cars can be hugely expensive. Volkswagen, Toyota and General Motors spent a total of $27bn on R&D in 2012, says the FT. I’m worried that Google could end up shelling out of a lot of money on this project.
Granted, Google made an operating profit of $15bn last year, and it has a $55bn cash pile, so it could easily find the money. But that’s not the point.
What’s bothering me as a shareholder is that Google’s car project could burn up a big chunk of the cash pile as well as future profits, and Google may end up with little to show for all that spending in five or ten years’ time.
You see, Google isn’t the only company working on driverless cars. It’s up against pretty much all the major car manufacturers. Nissan plans to have a driverless car on garage forecourts in 2020. There is no guarantee that Google will end up as the winner in this market.
In fact, there’s no guarantee that driverless cars will ever become a commercial success. I wouldn’t be surprised if consumers prove resistant, and insurers may not be keen either. Would Google or any of the other car manufacturers be able to accept liability for any future accidents?
And driverless cars aren’t the only area where Google could end up spending a lot of capital on R&D. The company is working on robots, broadband balloons, and solar-powered drones. And who knows what other ‘moonshots’ are being developed in the secretive ‘Google [x]’ lab?
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Google has made its business riskier
When I invested in Google, I invested primarily in a web advertising company that was also working in some other technology areas. I didn’t mind a small portion of profits going into some funky research on the side. I still don’t mind that.
What I didn’t want to see was billions of dollars being invested into new products – especially in areas that aren’t traditional areas of expertise for Google. It didn’t dawn on me that Google might choose to take a new car all the way through to market on its own. But now I can see that may well happen.
That’s a shame because, in the long run, I want Google to use its cash pile to develop its core business. And if that isn’t possible, Google should pay the money out to shareholders via dividends or buybacks.
But if Google takes a driverless car to market launch on its own, the cash pile could well shrink a fair bit.
I’m not suggesting that Google should shut the car project down. But it should be looking to form partnerships with at least one of the main car manufacturers. Expertise from, say, Ford wouldn’t go amiss, and such a partnership would reduce the capital spend for Google, and therefore the risk for investors.
Then, even if the car project went wrong, there would still be plenty of money left for Google shareholders from the web business.
And if a partnership with a car manufacturer isn’t possible, Google should think about spinning off the car business as a separate company in the relatively near future – perhaps two years. A separate business would be great news for investors because we could all make our own decisions on how much we want to invest in web advertising and how much in driverless cars.
That’s what I’d like to happen. But I suspect that’s not how things will pan out.
That makes me nervous, but not nervous enough to actually sell. The valuation is still too tempting, and I’ll just have to accept the extra risk. And, who knows, maybe I’ll get lucky and Google will end up dominating the road as well as the web.
But I’ll be watching out for further ‘moonshot’-type projects that might start to distract from the main business.
By the way, if you are interested in technological trends, you should read our latest report. We released it at the weekend – it deals with a huge and very exciting theme that we think every investor should understand, and be ready to profit from. If you missed it, check it out here.
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