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The Scariest Threat to These Stocks Is Very Real

By Daniel Miller – Nov 22, 2016 at 5:47AM

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Experts say it's unlikely that the development of autonomous vehicles and car-sharing programs will break Americans' long habit of owning vehicles, but I'm not so sure.

Automotive dealership stocks such as AutoNation (NYSE: AN)Penske Automotive Group (NYSE: PAG) have always been intriguing plays within the greater auto industry. That's simply because unlike the major  manufacturers such as General Motors (NYSE: GM), they don't depend a handful of brands or vehicle segments for financial success -- they can own multiple franchises that sell as many different brands as they choose. Further, the dealership segment is incredibly fractured. Only a handful of groups can generate economies of scale, but those that can have a significant advantage.

Despite those favorable qualities, one of the biggest risks to dealership stocks is the expected widespread adoption of autonomous vehicles, and one expert recently noted how devastating that future could be for those companies.

Image source: Getty Images

Scary, but true

If mobility services converge with autonomous vehicles, such as what Uber is testing in Pittsburgh today, and, in so doing, succeeds at breaking the age-old bond of ownership between Americans and their cars and trucks, that would change things dramatically. Our own estimate is that this is relatively unlikely to happen, but, if it did happen, it would be cataclysmic and has to be flagged. -- Consultant Glenn Mercer at AutoConferenceLA Tuesday (from Automotive News)

Cataclysmic, indeed, and in my opinion, it's not a matter of if, but a matter of when. It won't happen within the next decade, and could take longer than two, but it's going to happen, and it's already started.

Follow the money

It seems like every day, investors hear about a new tech company moving into the autonomous vehicle fold, such as Samsung's recent $8 billion acquisition of Harman, which provides a multitude of electronic and audio products to the auto industry. But just as many major automakers are looking to develop the next big thing.

Hyundai is a recent example; it finally jumped into its first large-scale car-sharing project. WaiveCar, a start-up company that rents ad-laden cars free for two hours with an option to extend it an additional hour for $5.99, has intrigued big advertisers, but their common complaint was that its fleet of advertising vehicles was too small. That's where Hyundai comes in. It will supply WaiveCar with a fleet of 400 IONIQ electric vehicles by the end of 2017. Many large advertisers noted that WaiveCar would need at least 100 vehicles to get their attention.

Or take GM's much larger and more ambitious Maven brand, which covers the company's car-sharing and personal-mobility projects, its investment in ride-hailing company Lyft, and its acquisition of Cruise Automation, which will boost its autonomous research. It's pretty clear where GM is heading, and its current destination involves far more than just producing your favorite sports car, truck or SUV.

These are literally just a handful of the many potentially game-changing moves across the industry over the past year. Even from my own personal experience -- I live in a major downtown area where everything I need is within walking distance, public transportation or an Uber/Lyft ride. It was an extremely tough decision whether to keep my car, which costs $100 per month for parking alone, or to go vehicle-free, an option I would have scoffed at as being unrealistic not even a decade ago.

All is not lost

Large automotive dealerships will remain intriguing investments in the near-term, because in addition to the perks listed in the intro, they often generate a lot of bottom-line profit from their service bays – hedging them somewhat from new-vehicle sales slowdowns.

But long-term investors, make no mistake: The auto industry will evolve more in the next two decades than it has over the past century. And if all the capital pouring into developing autonomous vehicles and car-sharing programs does indeed break America's long-standing vehicle ownership patterns, dealership groups could be the next newspaper industry. 

Daniel Miller owns shares of General Motors. The Motley Fool recommends General Motors and Penske Automotive Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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