I like Google – but this driverless cars business has me worried

Google's driverless car
How Google’s cars might eventually look

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?


Sign up for a 4-week FREE trial of MoneyWeek magazine

MoneyWeek magazine signup

"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd.


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.

This article is taken from our FREE daily investment email Money Morning.
Receive our thought-provoking investment email every weekday morning plus occasional promotions & become a smarter investor.

Please enter a valid email address

To sign-up enter your email address.




• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

Our recommended articles for today

A savvy investor’s guide to corruption

SUBSCRIBERS ONLY

If you know what to look out for, investing in corrupt markets can actually boost your returns, says Jonathan Compton.

This is the key to successful trading

You can’t count on successful stocks to bail out your losers every time, says David Thornton. Sometimes you just need to know when to cut your losses.

4 Responses

  1. 30/05/2014, Jacket wrote

    I love how the Google founders do whatever they want to do. These guys are true entrepreneurs. You wouldn’t get fat old companies doing anything like this. When the founders have sold out and lost control, the innovation in a business dies out. Shareholders become the number 1 priority – paying dividends, maximizing value, trying to squeeze every last cent out of the customers.

    Dull, dull, dull.

    We’ll all be dead one day. Do you want to play your life safe or do you want to push the boundaries, have fun with new tech and put your money in young, proven entrepreneurs like Brin, Page and Musk?

    For me, Google is as investible now as its ever been.

  2. 30/05/2014, Longtermyieldman wrote

    There are two ways of reading the self-driving car innovation. One is that Google is throwing off so much cash that it feels the need to spend some of it on diversions, at least in part so it does not appear to be making monopolistic profits and hence attracts the opprobrium of governments. This would fit with a lot of what I hear about working there: Google employees are some of the most cosseted anywhere in the world.

    The alternative view is that Google does not actually plan to be a manufacturer of cars, but rather than it is innovating in the area of autonomous vehicles with the intention of licensing any technology to existing carmakers. Indeed, it already generates revenue in this way, with a wide range of well-known brands signed up for its mapping-related services.

    Google will never build cars, not only because of the huge capital investment required but because the industry already suffers from excess capacity, which results in existing players achieving woeful returns on shareholders’ capital. Were it not for prohibitive exit costs, there would be fewer car companies than there are.

    Finally, there’s the possibility that both explanations are true: by spending on blue-sky R&D, Google depresses profits and protects itself against allegations of profiteering; and at the same time, it hopes to develop services it can monetise, adding to returns and diversifying away from its original, ad-supported search business.

  3. 02/06/2014, Ed Bowsher wrote

    Both interesting responses, thanks.

    I wouldn’t completely rule out Google manufacturing cars – look at Tesla. But hopefully you’ll right and Goog will license its technology onto another manufacturer before too long.

    Ed

  4. 04/06/2014, hebbzee wrote

    As well as web advertising, Google is a serious software company. Google Chrome has successfully challenged Microsoft’s Internet Explorer as a browser, and Android and Google OS will try the same as operating systems. The trouble is Google start so many hares that important projects, such as Google Chrome OS, don’t get the ongoing attention they need. Given Microsoft’s market position, this issue is of prime interest to investors.

Comment on this article

MoneyWeek magazine

Latest issue:

Magazine cover
Hard cash

What's next for gold and silver?

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

FREE REPORT:
What you should really do with your money (2014 Edition)


How to buy and sell penny shares

A beginner's guide to investing in gold

How to invest in British fracking