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You May Be Able to Buy a Self-Driving Car After All

Technology supplier Mobileye has articulated a credible path to vehicle autonomy, and unlike most peers can fund its way

By STEPHEN WILMOT
Mon, Jan 9, 2023 10:05amGrey Clock 3 min

A year ago, investors were wildly optimistic about the potential of automotive technologies such as automated driving. They now risk swinging to the opposite extreme.

Anyone looking for an idea of the cars that might be on sale in five years’ time likely found the news from this year’s CES in Las Vegas more muted than usual. Stellantis showed off new concept electric vehicles on Thursday, including a highly anticipated Ram pickup truck, but in reality it is playing catch-up with peers such as Ford and General Motors. Sony unveiled a brand for its new automotive joint venture with Honda, Afeela, but didn’t give many details of the much-hyped EV they expect to start selling in North America in 2026.

As Stellantis Chief Executive Officer Carlos Tavares pointed out in his keynote speech, more than $1 trillion of market value was wiped off automotive technology stocks last year. This isn’t just about Tesla: Shares in early-stage companies that don’t make profits have been even worse hit. That makes car makers understandably reticent about putting too much weight on—or money behind—the gizmos CES is best known for. Autonomous vehicles, the focus of much futurism in the industry, have taken a public beating, particularly since Ford and Volkswagen in October pulled the plug on their driverless-taxi joint venture.

Investors shouldn’t mistake the cautious turn in communication and funding for a lack of technological progress, though. Driverless taxis run by Alphabet’s Waymo and GM’s Cruise continue to roam the streets of San Francisco and Phoenix, albeit very cautiously and with strict limitations. The problem with these projects is that they are hugely expensive, with no proven business model or clear route to commercial scale. Unless this changes, they could suffer in a tighter financial environment.

Two Western companies above all make meaningful profits from the automation of driving today: Tesla and Israeli supplier Mobileye.

The former now charges $15,000 for its so-called “full self-driving” software package that automates most mundane driving tasks but, crucially, requires drivers to keep their eyes on the road as a backup. Tesla said late last month that 285,000 Tesla owners in North America had bought what it refers to as FSD, though far from all of them will have paid the latest price.

Mobileye, which was spun out of chip giant Intel last year through an initial public offering, has a comparable “eyes-on, hands-off” offering it calls SuperVision, in addition to the more basic assisted-driving technology that generates most of today’s profit. In an update at CES on Thursday, co-founder and CEO Amnon Shashua said SuperVision had a cumulative revenue pipeline of $3.5 billion through 2030, based on the production estimates of car makers that have included the technology in coming models.

Mr. Shashua also gave a levelheaded account of how Mobileye would move into the more adventurous realm of extended “eyes-off” autonomy, at least on and between highways. By adding a second sensor suite and then testing the finished product in an eyes-on “shadow” mode, Mobileye expects to deliver in 2026 the kind of provably safe automated driving that would actually give consumers time back. It said it already had “line of sight” toward $1.5 billion in revenue from one vehicle program that will likely include the product.

It is frustrating that Mobileye can’t yet reveal which brands are backing its latest products, beyond its Chinese launch partner Zeekr, but the supplier’s technological path to a more useful self-driving future seems much clearer than Tesla’s. The car maker run by Elon Musk has no plan to include backup sensors and doesn’t publish data on how often its system requires the human driver’s intervention—an approach unlikely to win over regulators or the broad public.

But the real appeal of Mobileye for investors is that it doesn’t demand an all-in bet on full autonomy: SuperVision and basic driver-assistance packages should underpin profitable growth for years. A forward earnings multiple of 44 times is ahead of 33 times for Nvidia, arguably its closest peer, but Mobileye should grow faster. Plus, a small premium doesn’t seem a big stretch for a company that could, maybe, let you read a book on your future commute.

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Equities are often seen as expensive after promising start to 2023

By CAITLIN MCCABE
Mon, Jan 30, 2023 7 min

A new trading year kicked off just weeks ago. Already it bears little resemblance to the carnage of 2022.

After languishing throughout last year, growth stocks have zoomed higher. Tesla Inc. and Nvidia Corp., for example, have jumped more than 30%. The outlook for bonds is brightening after a historic rout. Even bitcoin has rallied, despite ongoing effects from the collapse of the crypto exchange FTX.

The rebound has been driven by renewed optimism about the global economic outlook. Investors have embraced signs that inflation has peaked in the U.S. and abroad. Many are hoping that next week the Federal Reserve will slow its pace of interest-rate increases yet again. China’s lifting of Covid-19 restrictions pleasantly surprised many traders who have welcomed the move as a sign that more growth is ahead.

Still, risks loom large. Many investors aren’t convinced that the rebound is sustainable. Some are worried about stretched stock valuations, or whether corporate earnings will face more pain down the road. Others are fretting that markets aren’t fully pricing in the possibility of a recession, or what might happen if the Fed continues to fight inflation longer than currently anticipated.

We asked five investors to share how they are positioning for that uncertainty and where they think markets could be headed next. Here is what they said:

‘Animal spirits’ could return

Cliff Asness, founder of AQR Capital Management, acknowledges that he wasn’t expecting the run in speculative stocks and digital currencies that has swept markets to kick off 2023.

Bitcoin prices have jumped around 40%. Some of the stocks that are the most heavily bet against on Wall Street are sitting on double-digit gains. Carvana Co. has soared nearly 64%, while MicroStrategy Inc. has surged more than 80%. Cathie Wood‘s ARK Innovation ETF has gained about 29%.

If the past few years have taught Mr. Asness anything, it is to be prepared for such run-ups to last much longer than expected. His lesson from the euphoria regarding risky trades in 2020 and 2021? Don’t count out the chance that the frenzy will return again, he said.

“It could be that there are still these crazy animal spirits out there,” Mr. Asness said.

Still, he said that hasn’t changed his conviction that cheaper stocks in the market, known as value stocks, are bound to keep soaring past their peers. There might be short spurts of outperformance for more-expensive slices of the market, as seen in January. But over the long term, he is sticking to his bet that value stocks will beat growth stocks. He is expecting a volatile, but profitable, stretch for the trade.

“I love the value trade,” Mr. Asness said. “We sing about it to our clients.”

—Gunjan Banerji

Keeping dollar’s moves in focus

For Richard Benson, co-chief investment officer of Millennium Global Investments Ltd., no single trade was more important last year than the blistering rise of the U.S. dollar.

Once a relatively placid area of markets following the 2008 financial crisis, currencies have found renewed focus from Wall Street and Main Street. Last year the dollar’s unrelenting rise dented multinational companies’ profits, exacerbated inflation for countries that import American goods and repeatedly surprised some traders who believed the greenback couldn’t keep rallying so fast.

The factors that spurred the dollar’s rise are now contributing to its fall. Ebbing inflation and expectations of slower interest-rate increases from the Fed have sent the dollar down 1.7% this year, as measured by the WSJ Dollar Index.

Mr. Benson is betting more pain for the dollar is ahead and sees the greenback weakening between 3% and 5% over the next three to six months.

“When the biggest central bank in the world is on the move, look at everything through their lens and don’t get distracted,” said Mr. Benson of the London-based currency fund manager, regarding the Fed.

This year Mr. Benson expects the dollar’s fall to ripple similarly far and wide across global economies and markets.

“I don’t see many people complaining about a weaker dollar” over the next few months, he said. “If the dollar is falling, that economic setup should also mean that tech stocks should do quite well.”

Mr. Benson said he expects the dollar’s fall to brighten the outlook for some emerging- market assets, and he is betting on China’s offshore yuan as the country’s economy reopens. He sees the euro strengthening versus the dollar if the eurozone’s economy continues to fare better than expected.

—Caitlin McCabe

Stocks still appear overvalued

Even after the S&P 500 fell 15% from its record high reached in January 2022, U.S. stocks still look expensive, said Rupal Bhansali, chief investment officer of Ariel Investments, who oversees $6.7 billion in assets.

Of course, the market doesn’t appear as frothy as it did for much of 2020 and 2021, but she said she expects a steeper correction in prices ahead.

The broad stock-market gauge recently traded at 17.9 times its projected earnings over the next 12 months, according to FactSet. That is below the high of around 24 hit in late 2020, but above the historical average over the past 20 years of 15.7, FactSet data show.

“The old habit was buy the dip,” Ms. Bhansali said. “The new habit should be sell the rip.”

One reason Ms. Bhansali said the selloff might not be over yet? The market is still underestimating the Fed.

Investors repeatedly mispriced how fast the Fed would move in 2022, wrongly expecting the central bank to ease up on its rate increases. They were caught off guard by Fed Chair Jerome Powell‘s aggressive messages on interest rates. It stoked steep selloffs in the stock market, leading to the most turbulent year since the 2008 financial crisis. Now investors are making the same mistake again, Ms. Bhansali said.

Current stock valuations don’t reflect the big shift coming in central-bank policy, which she thinks will have to be more aggressive than many expect. Though broader measures of inflation have been falling, some slices, such as services inflation, have proved stickier. Ms. Bhansali is positioning for such areas as healthcare, which she thinks would be more insulated from a recession than the rest of the market, to outperform.

“The Fed is determined to win the war since they lost the battle,” Ms. Bhansali said.

—Gunjan Banerji

A better year for bonds seen

Gone are the days when tumbling bond yields left investors with few alternatives to stocks. Finally, bonds are back, according to Niall O’Sullivan of Neuberger Berman, an investment manager overseeing about $427 billion in client assets at the end of 2022.

After a turbulent year for the fixed-income market in 2022, bonds have kicked off the new year on a more promising note. The Bloomberg U.S. Aggregate Bond Index—composed largely of U.S. Treasurys, highly rated corporate bonds and mortgage-backed securities—climbed 3% so far this year on a total return basis through Thursday’s close. That is the index’s best start to a year since it began in 1989, according to Dow Jones Market Data.

Mr. O’Sullivan, the chief investment officer of multi asset strategies for Europe, the Middle East and Africa at Neuberger Berman, said the single biggest conversation he is currently having with clients is how to increase fixed-income exposure.

“Strategically, the facts have changed. When you look at fixed income as an asset class…they’re now all providing yield, and possibly even more importantly, actual cash coupons of a meaningful size,” he said. “That is a very different world to the one we’ve been in for quite a long time.”

Mr. O’Sullivan said it is important to reconsider how much of an advantage stocks now hold over bonds, given what he believes are looming risks for the stock market. He predicts that inflation will be harder to wrangle than investors currently anticipate and that the Fed will hold its peak interest rate steady for longer than is currently expected. Even more worrying, he said, it will be harder for companies to continue passing on price increases to consumers, which means earnings could see bigger hits in the future.

“That is why we are wary on the equity side,” he said.

Among the products that Mr. O’Sullivan said he favours in the fixed-income space are higher-quality and shorter-term bonds. Still, he added, it is important for investors to find portfolio diversity outside bonds this year. For that, he said he views commodities as attractive, specifically metals such as copper, which could continue to benefit from China’s reopening.

—Caitlin McCabe

 

Find the fear, and find the value

Ramona Persaud, a portfolio manager at Fidelity Investments, said she can still identify bargains in a pricey market by looking in less-sanguine places. Find the fear, and find the value, she said.

“When fear really rises, you can buy some very well-run businesses,” she said.

Take Taiwan’s semiconductor companies. Concern over global trade and tensions with China have weighed on the shares of chip makers based on the island. But those fears have led many investors to overlook the competitive advantages those companies hold over rivals, she said.

“That is a good setup,” said Ms. Persaud, who considers herself a conservative value investor and manages more than $20 billion across several U.S. and Canadian funds.

The S&P 500 is trading above fair value, she said, which means “there just isn’t widespread opportunity,” and investors might be underestimating some of the risks that lie in waiting.

“That tells me the market is optimistic,” said Ms. Persaud. “That would be OK if the risks were not exogenous.”

Those challenges, whether rising interest rates and Fed policy or Russia’s war in Ukraine and concern over energy-security concerns in Europe, are complicated, and in many cases, interrelated.

It isn’t all bad news, she said. China ended its zero-Covid restrictions. A milder winter in Europe has blunted the effects of the war in Ukraine on energy prices and helped the continent sidestep recession, and inflation is slowing.

“These are reasons the market is so happy,” she said.

—Justin Baer

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