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Why Investors Are Excited About These 2 Auto Stocks

By John Rosevear - Dec 21, 2020 at 4:06PM

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From smaller, super-dense batteries to state-of-the-art navigation technologies, discover how these companies are changing the sector.

In this episode of Industry Focus: Energy, Nick Sciple chats with Motley Fool senior auto specialist John Rosevear about two recent IPOs in the auto space and the innovations they are bringing in the electric-vehicle battery and self-driving technologies. They also look at what the old stalwarts of the industry are up to. In addition, they discuss the growth potential of these two businesses and the potential challenges they may face, and whether they make good investments. John also shares the trends he is looking forward to in 2021, and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on December 17, 2020.

Nick Sciple: Welcome to Industry Focus. I am Nick Sciple. This week, we're sharing our thoughts on QuantumScape ( QS -4.88% ) and Luminar ( LAZR -3.15% ), two automotive tech IPOs that investors just can't stop asking about.

Joining me, to break it all down is Motley Fool senior auto analyst, John Rosevear. John, welcome back on the podcast.

John Rosevear: Thanks for having me, Nick.

Sciple: It's great to have you back on the show. [laughs] You know, 2020 has been the year of electric vehicles with Tesla going on an incredible run and large numbers of SPACs. [Special Purpose Acquisition Company] We've got Chinese companies like Xpeng and others coming to the market. What has it been like this year as someone who covers the space?

Rosevear: It's been like the firehose. You know, every time I think I've got -- OK, the last batch of companies that came to public, that started taking off. Okay, we've got data on them, we've connected with the companies, we have a sense of where they're going financially. Oh, look, there's three new ones. And it's just been that since March, really, just over and over. We've been watching companies like NIO for a while. NIO was in real financial trouble early in the year, then they got a bailout, then their stock took off, they raised money, they raised more money. Now, they're looking really good. And then all the SPAC deals that started with Nikola. And there are new ones last week we were talking about that I still don't have my head around yet.

Luminar is very new to the public markets, but they've been around a while, so we've had a sense of who they are. QuantumScape is new to the public markets, they've been around a while, but they've been very secret about what they're doing until last week, really, and now we know what they're about and what the potential looks like. And we can start to figure out what this is. It's been that constantly, constantly.

And in the meantime, sort of, the old companies in this business, Volkswagen, Ford, General Motors, they've all been busy as well. There have been stories, they're surviving the economic downturn that was caused by the pandemic, they've got new technology coming. GM is spinning up all sorts of great things. Ford just launched its electric vehicle. You know, there are stories there too that will be of interest to investors. And in there somewhere are some companies that'll be profitable investments over the next few years.

It's been wild. [laughs]

Sciple: Yeah. I guess, you know, the one line I'm thinking about, is it from Anchorman, like, "that escalated quickly," right? I mean, that's kind of how it feels like for this year. You did mention the QuantumScape, and that is the latest one in the news. I want to talk about that one in some depth a little bit today.

It's been up significantly this month. Just in the last 30 days, the stock rose over 180% on what some see to be a potential breakthrough in battery technology announced earlier this month. So, John, first tell us what QuantumScape does and why do we care so much right now, this month in particular?

Rosevear: Well, [laughs] this month in particular, because they've started telling us what they're doing. So, OK, there is an idea, a thing, that hasn't really made it out of the laboratories yet, a solid-state battery, this does away with the liquid part of a lithium-ion battery and instead uses a solid-state separator in QuantumScape's case. This is an ingenious piece of flexible ceramics that is a proprietary material they have developed.

And so the advantages here, from a point-of-view of building an electric car, which is where they're going with this, the battery can be smaller, it can be more power dense, meaning you can stick more power inside the same physical space, and it's less likely to catch on fire, as we've seen -- you know, we all know that there have been incidents with lithium-ion batteries. And automakers from Tesla, to GM, to everybody, have built-in systems to their car to try and minimize that risk. Well, the risk with a solid-state battery is just much lower. It's safer, it takes up less room, it's less weight per vault for kilowatt-hour of energy, and it can be recharged more quickly. They think a solid-state battery vehicle will be able to be recharged to, you know, a couple of hundred miles of range in, like, 10 minutes rather than, like, 25 to 30 minutes that we see now with faster chargers.

So, it's a step-change in improvements in battery technology, specifically for electric cars, but also elsewhere. But the problem has been manufacturing these things, all along. How do we make them at scale at a price that makes any sense? And this technology has been kicked around for a while. What QuantumScape is saying is that they may have cracked the code with this proprietary ceramic separator that goes into their batteries. And if so, then sometime in the next five to seven years, give or take, they will be able to roll these out at scale for electric vehicles.

And, you know, it's tempting to say, OK, five years, whatever. But remember that Volkswagen is a big investor in this company and is partnering with them to help get this to manufacturing. And Volkswagen is only the world's largest or second-largest automaker. I don't know how they're running against Toyota this year, but they are, you know, a giant of giants. So, we have to take this seriously.

And it is, on paper, from what I know, I am not a battery scientist, etc., etc. But the battery scientists I know say there's a lot of potential here, if they can commercialize it.

Sciple: Right. When you list a lot of those things about increased energy density, faster recharging, this is among the biggest pushbacks that folks will have on adopting an electric vehicle. You know, what happens when I have to recharge, I don't want to be stuck out there. You solve those two problems, obviously, really significant. And then, yeah, as you mentioned, the fire thing is interesting because traditionally, the way you get these fires in electric vehicle batteries is, over time, when you charge and discharge the battery a number of times, the lithium in the battery develops these things are called dendrites, think of it like a stalactite in a cave that grows over time. And eventually that links up the positive side of the battery to the negative side of a battery and a fire occurs. But in this case, with a solid-state battery, instead of using a liquid electrolyte to transmit the ions, in this case, it's physically transmitting, there's a physical barrier that prevents those dendrites from passing across, which obviously is a boost for safety. But you mentioned this idea, if you have to get the scale, that's a big "if," what timeline are we talking about here and what's the competition look like?

Rosevear: Five to seven years they're saying, 2025-2027, that neighborhood. On the one hand, there aren't too many other efforts that appear to be that close to market. On the other hand, there are some efforts, including one very big name, Toyota. Toyota said recently that they're going to show a solid-state battery-powered electric vehicle sometime next year, probably late next year. And that it could be in production 2022, toward the end of the year. So, that's two years away. We have no idea what Toyota's battery technology looks like. We have no idea how it compares with QuantumScape in terms of capacity, cost, weight, etc. But what we do know is that Toyota has thrown tons of money at this problem and the Japanese government is throwing resources at this problem, and Toyota's interlinked network of suppliers is working on this problem. So, this is far beyond anything a start-up could muster, you know, even a start-up with soaring valuation that can raise a ton of money.

And Toyota has been cagey about what it has until recently, in fact until a couple of days after QuantumScape's presentation. There was a [laughs] story that appeared and Nikkei sources inside Toyota who are knowledgeable, outlining this plan. And Toyota itself hasn't said anything directly in public. But we now have a sense that there's somebody, at least one other entrant in this market that is coming possibly before QuantumScape could get to market.

Sciple: Yeah, there was one other company I wanted to mention as well, called Solid Power, they're a company that, again, had [laughs] some press suspiciously come out right after QuantumScape put out their news. They've got partnerships with Ford and BMW; they say that they're going to be getting ready for automotive qualification here in 2022. So, some competition is coming on to that market. And so, there's this question of how do we get from this product that, at least based on the test data they've put out, appears to solve a lot of problems, to reach scale. They have smart backing from Volkswagen. And also, it's worth mentioning, if you look at the Board of Directors, J.B. Straubel Co-Founder at Tesla, someone who is really important to their battery efforts early on, is on the Board of Directors as well. Brad Buss as well is on the Board of Directors, someone who has been linked with Tesla for a long period of time.

But if you look at this company as an investment, what do you think about it today? We talked about some of the competition coming on board, some of the execution risk. It's $22 billion market cap today, and if you look at their revenue, it's approximately $0. If you're buying this stock today, what thesis have you got to be taking, how should you be handling it?

Rosevear: It's a potential moonshot. Even if they're just Toyota's preferred battery supplier of choice, in seven years that's going to be a big business. Toyota wants to be selling 3 million EVs a year in five years. So, think of this as the next generation of Toyota electric vehicles that will come out toward the end of the decade that could be powered by these batteries, if all pans out, if they can jump the hurdles. And that's, boom! Instead market 3 million to 4 million vehicles a year by then; maybe more. And that's just with Toyota.

And if they really do have the best solution, then, you know, other automakers could come to them, including some of the newer automakers. And it will be, you know, how fast can you build your plants, how fast can you scale up, how fast can you make that magic ceramic to fill all these orders, because you're going to have a lot of orders.

It could be a key component of this technology that we expect is going to eventually displace internal combustion vehicles over the next 15 years. On the other hand, I mean, they could get beat in the market and this company gets acquired for a song by VW at a substantial discount or something. We don't know.

I think it's a solid bet, in part because Volkswagen is involved here, and in part because the people running it have been involved in this space for really a decade now. They are very smart, they are highly regarded by people who are experts, who I've talked to, and said no, these people are the real deal.

If you want to look at their CEO, go to YouTube and search for QuantumScape, you can see the presentation they did last week, which was narrated by the CEO. And you can tell that he really knows this in-and-out. And one of the ways you can tell, is he explains it all in accessible plain English. Any reasonably bright person can watch this video and go, wow! OK, I understand their technology. You don't need any background or anything else. And that kind of leadership tends to go places.

That said, the competition here is going to be fierce, we may end up with three or four makers with somewhat different technology at different price points. You know, maybe there's another company that comes in with a lower cost product that isn't quite as efficient, isn't quite as energy dense, there is room here. I mean, the automakers around the world sell close to 100 million cars every year. There's a lot of room in this market. It is tough to get a big chunk of that market with anything, unless it's a little specialist part. So, as I said, even if Volkswagen turns out to be their only major client, it's still a big potential market, they'll be selling a lot of batteries in a decade if they can get them to production in a timeframe and with a product that is competitive.

Sciple: Last thing, when we look at, you know, we mentioned the relationship with Volkswagen. Volkswagen is the biggest shareholder in QuantumScape, and has a relationship going back to 2012. We talked about how these solid-state batteries, the increased density, faster charging, can really solve a lot of these problems that buyers give pushback on when it comes to electric vehicles. Is this relationship with QuantumScape, do you think that's something that could be a meaningful advantage for Volkswagen going forward, having access to this technology, or do you think this is something where, you know, all the automakers are going to have it in some way, shape, or form and this is kind of a table stakes thing as we move forward in the industry?

Rosevear: Go out 15 years, everybody will have it. In seven years, it's very possible that only Volkswagen has it, and that they can come out with faster charging and so forth. But then I add the caveat, note that Toyota is in this space, Ford is in this space, etc., etc., etc. And these are also heavy-hitters. But yes, it could go the way that only a couple of the major players have it. And, you know, you can buy an electric vehicle with the old battery that gets 300 miles of range and recharges to 80% in 30 minutes, or you can buy one that has 600 miles of range and recharges in 10 minutes. If it's at a similar price or even a lower price, that's a compelling offering.

Again, then we back up and say, it's such a huge market that nobody can take a dominant share. [laughs] And that's how autos work. And we have to remember that too. Nobody is going to get 40% of this market, not even Tesla, nobody is going to get 40% of this market.

Sciple: So, I think the takeaway is, I think this, at least for me, this technology has lots of potential. I think it's safe to say that QuantumScape is likely to be an important player in that market, but there's a lot of "ifs" when it comes to how quickly this is going to scale up. Who is going to be the ultimate, you know, three, four, five people that really are significant players in this market? And if you look today, you're paying a +$20 billion valuation on essentially all if. When you look at the revenue side of the business, there's really not much to speak of there.

So, this is very much a venture capital type investment of how you have to invest as someone who needs to take a really long-term time horizon. The market has clearly got a lot of optimism baked in here, but there's several years between now and that optimism being realized in any shape, form, or fashion. So, certainly potential here, but just be aware of the timescale and the challenges between now and there.

Any last thoughts on QuantumScape, John?

Rosevear: I think the VC metaphors are really good. I mean, there are a lot of VC investments that go to zero. Will this go to zero? Probably not, somebody will acquire it; maybe Volkswagen. But it could go to relative zero compared to where we buy-in. It's a moonshot. It's better than a lottery ticket, but it's still a moonshot. Buy some, tuck it away, and think about it in a few years from now, could be a good strategy.

If you're interested in this space, this is one way right now to get, sort of, a pure play investment in solid-state battery tech for autos. Don't put your whole portfolio in it. [laughs]

Sciple: Yeah. I think maybe one of the most exciting things about this company, you talked about the secrecy with which Toyota and some of these other companies have treated this subject. Well, now you have a company that's required by law to give us public disclosures about their progres, so at the very least, we're going to have some interesting insight into what's going on in that industry going forward.

I wanted to move on now to Luminar. This is another company playing at a different subsector of this automotive technology trend. Completed their acquisition transaction with Gores Metropoulos SPAC to come public. Beginning of December, the stock surged over 120%. Today it settled up around 40% since that deal closed, for a market cap of about $8 billion.

John, what does Luminar do?

Rosevear: Luminar makes LiDAR sensors and related software. So, now we have to answer the question, what is a LiDAR sensor? LiDAR stands for Laser Detection and Ranging. [Light Detection and Ranging] (sic) They're bouncing laser beams beyond the visible spectrum, high-frequency laser beams off of objects and they can make a detailed 3D map, essentially, of the surroundings of wherever the sensor is. They have lots of applications with robotics. Where we look at them specifically, because it's a potentially huge market, is self-driving vehicles and more advanced driver assist systems.

In most of the self-driving technologies under development now, what we see are LiDAR sensors being used together with cameras and radar as a sort of belt and suspenders approach to making sure you know where the car is. When we talk about self-driving vehicles that are limited to specific areas, they're limited because the automaker, or the provider of the technology, wants to have a highly detailed 3D map of wherever the car is likely to go. Using LiDAR, you can compare it dozens of times a second where the car is relative to that map and you can know exactly where you are within a few centimeters. It's an important safety technology.

With self-driving cars, most of the companies in this space are going with aviation levels of redundancy. You've got to have a couple of ways of doing the same thing, because if you're under way at 60 miles an hour with people onboard and something breaks, you need to, at very least, you know, make a safe landing, get off the road safely. If not, ultimately carry on to the destination.

So, this is not something you build in your garage; [laughs] you know, at least not for production. LiDAR gives a lot of insurance, together with 3D maps, that you know exactly where your car is and that you're clear of anything you're likely to hit and that you're on course, and you know, you're not about to bump-up against the curb and bend your wheel and all of that kind of thing. That's what makes it important.

Luminar, specifically, has focused from the start on automotive-grade LiDAR. And we need to talk a little bit about what that means. A piece of technology that is going to survive for 10 years, 200,000 miles in a car, operate at 20 below zero and 120 above, and go over bumps, and this and that, without failing, that's automotive-grade. You know, you can't just put consumer technology in a car and expect it to work long-term. Some of the newer automakers have found that out the hard way, when they've put consumer tablets in their dashes and so forth, and they've had to replace them after a couple of years; that has been a lesson for some of the newer entrants, I think we're all onboard with this now.

But Luminar is specifically focusing on automotive-grade LiDAR. They have been around for a long time, they were relatively secret, although we did know something about them. We started to see more press, more statements from them over the last year, year-and-a-half, but now they're public and we're going to know a lot about them. Their system, they have several different flavors of system geared from whether you're just using it for, for instance, an automated parking system or whether you're doing full-blown self-driving or various points in between. They have worked with several automakers, they're working with Daimler, which is Mercedes-Benz parent company. Daimler also owns several heavy truck brands including the Mercedes heavy-truck and freightliner. They're working on self-driving trucks and advanced driver assist for heavy trucks. Luminar is helping that with LiDAR and related software. Obviously, the sensor is one thing, but you also need the software to process the images and so forth.

They're also working with Volvo Cars. They're going to be shipping LiDAR for an advanced driver assist for Volvo fairly soon. But perhaps the most intriguing partnership is with Mobileye. If you've been looking at the space for a while, you'll remember Mobileye. This is an Israeli company that specialized early on in machine vision, again, automotive grade machine vision, for the early driver assist stuff. They have moved into self-driving. They were acquired for a big premium by Intel, which thought that if they had an entry into automotive advanced technology, they could sell a lot of data centers; that was the business case in one sentence or fewer. Intel is having its troubles, but Mobileye is still a very strong company, works with most of the world's automakers. And they are now working to launch their own fleet of self-driving taxis in a few cities around the world starting in 2022. And that's not just because they want to run a giant taxi service, but also, I mean, these are rolling research laboratories for them as well, and they can do it.

They're working with NIO, the Chinese automaker we've mentioned a few times on here. NIO is going to build them electric taxis to order. And they're going to integrate, among other things, Luminar's LiDAR technology into those vehicles. Luminar says it's already shipping LiDAR units to Mobileye for test vehicles and so forth. So, that is already a business that's generating some revenue. They announced the deal in November, you can go read about that if you're interested in the company, and you should, that outlines exactly what Luminar is going to do with Mobileye and gives an overview of what Mobileye itself is doing in this space.

That makes it interesting. It makes it, really, one of the two big players in this space, such as it is right now, although the playing field could change a lot over the next five years.

The other company is Velodyne, who I think we've talked about in the past, they went public via a SPAC deal earlier this year. Velodyne, their investors include Ford and Baidu, which is working on self-driving cars in a similar way to how Google [Alphabet] has been working on self-driving cars, and for similar reasons. You see, their sensors, they look like hockey pucks with a green stripe, in fact, they call the pucks, on a lot of the prototype self-driving cars out in the last few years. If you go search pictures, you'll see them.

Luminar is clearly looking to, sort of, blow away Velodyne here. [laughs] When you talk to Luminar, they have Velodyne on their mind and in their sights. And they say, our stuff is automotive-grade, you know, Velodyne started with something that wasn't, and they're trying... etc., etc. Obviously, Velodyne has its own story too, and you shouldn't take that as gospel. But they are being very aggressive, they've got a whole bunch of partnerships with automakers, they're working specifically to make automotive-grade stuff. They're less interested in things like anthropomorphic robots and so forth, that you see Velodyne experimenting with, and also these machines that crawl around vent ducts and so forth, that are using Velodyne LiDAR to do that. You know, Luminar is going right at the car market. And as the playing field looks right now, they could get quite a chunk of it.

And it's not just a self-driving play, although it is a self-driving play, it's also, as I said, as advanced driver assist systems, short of self-driving get more advanced, LiDAR is coming more and more into play. They already have a deal from Volvo Cars. They say that they're working on deals with several other automakers along similar lines. As we all know, Volvo likes to be a pioneer in safety stuff, because they have been for decades, and they like to position themselves that way, that's a significant part of their brand. So, they're likely to take on advanced driver assist and safety systems aggressively over the next few years as that technology continues to advance. Luminar is going to be doing that with them, so that's going to be a market. Volvo isn't the biggest automaker, but it's a real automaker with a presence in China and so forth and so on.

They have other partnerships; they could win some more significant business over time. Their goal, in fact, it's written into their agreement with Mobileye, is that their systems at scale will cost less than a $1,000/vehicle, which is a price point at which, OK, you can get that as an option.

Sciple: Right. I mean, if you talk to folks in, kind of, the self-driving space, that the big constraints are two-fold. It's one, durability, that comes into the automotive-grade side. Often, historically, these things have had spinning lasers driving around that have to be incredibly tightly calibrated and all those sorts of things, which obviously creates a problem with operating these things at scale. And then secondly, has been cost. So, getting that cost down to where you can sell this to the consumer, I think, is really important.

So, you talked about, John, some about the market opportunity, I want to talk a little bit in a second about just how many players are in this space. But one area you didn't talk about, I think we should at least mention, is the Founder of this company, Austin Russell, he has a very interesting background, founded the company in 2012 at age 17.

Rosevear: Yeah, he is your classic super-smart nerd, you know? The storyline is, he memorized the periodic table of elements at age two or something. He was working in a laser lab, the story goes, and got into Stanford, was going to go to Stanford, and then he got a Thiel Fellowship from the fund set up by Peter Thiel where they give entrepreneurs, who want to bail out of college and run with their ideas, $100,000 to get started.

He partnered with an older scientist, I think it was somebody he'd been working within that original laser lab as a team, to set up Luminar. And they've been pushing very aggressively with this for a long time. I imagine, they've learned an awful lot of lessons along the way. So, yeah, you look at this picture of Luminar's CEO, and he's 25, and he looks 25; and I say that as someone who was always told he looked young. You know, no offense, Austin, that's a compliment; you'll realize that when you're my age. [laughs] But he's actually got a significant background in this space, a real background. And a lot of talent around him. And this is a real company with the potential to be a real player in this space, is the takeaway; even though he's a young guy.

Sciple: Yeah. I mean, if anything, he just can make myself and all our listeners feel like you haven't accomplished enough, this guy is worth -- it's an $8 billion company, he is worth over $1 billion, he's 25 years old. Man! He is doing pretty good for himself.

So, again, we talk about a lot of their partnerships and we talked about the significance of Velodyne as a player in the industry. Velodyne has been in this market going all the way back to the original DARPA competitions in the early 2000s, where a lot of the names that are the big names in self-driving today really got their start, and started coming up. But it's not just Velodyne that they're competing with, there's other companies, like Innoviz and Aeva that are also coming public via a SPAC this year. There were some rumblings that Mobileye might be developing its own LiDAR. You know, Waymo and others have acquired LiDAR companies in the past. When you look at the competitive landscape here, yeah, just thoughts on what Luminar is up against?

Rosevear: Well, Waymo is working on something inside solid-state LiDAR, which is parallel to solid-state batteries in the sense that you can file it in your brain as solid-state is cheaper and more durable. What it means is, it doesn't have the actual motorized laser sweeping back-and-forth, it's all solid, it doesn't move. Waymo did buy a start-up to do that. They are aiming to have $200 LiDAR units at some point. GM also bought a little start-up a couple of years ago, it wasn't widely noticed, it was sort of an acquihire, it was a whole bunch of talent that were just getting going on inexpensive solid-state LiDAR units. They have some hope for that. It is not clear how far they're going to go with it.

Ford bet on Velodyne a while back. You know, we've talked about the companies that have bet on Luminar directly or indirectly, including Daimler, which is not just heavy-trucks, but in time could be Mercedes-Benz as well. That's not an enormous company, but it's an enormously influential company, again, like Volvo, it's a company people watch for technology coming into mainstream automobiles, and have historically.

Yeah, there is a lot of space. Innoviz, when I said earlier in the program that it seems like a firehose of SPAC deals coming at us left-and-right, Innoviz was one of those. I had no idea they were negotiating with Collective Growth, the SPAC, and then, boom! There it was. Oh, they're going to market too. I mean, they work with Magna, with Aptiv, which is the old auto supplier. Delphi split in two a couple of years ago, and one part took the old legacy businesses building internal combustion engine components and so forth, and the other part, Aptiv, is the part that took all the interesting technology, the advanced driver assist. They've worked with Mobileye on self-driving type things. In fact, they were running around trade shows several years ago with prototype self-driving cars, Aptiv.

BMW, we all know BMW, that's a significant hitter. You know, I don't know as much about some of the other companies that are just emerging in this space. I do know, as we said, Sam says there's six companies here, give or take. Certainly, Luminar and Velodyne are the biggest ones, but as we learn more about some of these other companies, we may learn, you know, oh, they've been working with Fiat Chrysler for seven years or whatever, you know, that has just been out of the public eye. So, it is hard to see.

You know, if you want to bet on LiDAR, I'd say buy some Velodyne and buy some Luminar, and you're not likely to go too far wrong, but we don't know that either of those companies is going to be the eventual long-term winner here. And I guess it's important to say that, since we're an investing broadcast here. [laughs]

Sciple: Yeah, that's the one thing I wanted to, kind of, wrap up here with Luminar. You are looking at a company, 2019, revenue of about $12 million. I've mentioned a couple of times earlier on the broadcast that the market cap is about $8 billion today. You're looking at about $3.5 billion to $4 billion for Velodyne. And some of those other SPAC deals are in the $1 billion to $2 billion range, are going to come out here in 2021.

So, if you're going to invest in this space, again, would you say this is a kind of a VC approach? You're looking for, you know, smart backing and strong leaders that can really, kind of, take share in this space, but there's certainly a lot of uncertainty to the point that, you know, you don't make any of this 5%, 10% of your portfolio.

Rosevear: There's uncertainty to the point of, when are we going to see self-driving cars roll out in quantity? How far will automakers go in adopting advanced driver assist systems that are dependent on LiDAR over the next few years? But unlike QuantumScape, which really is a moonshot, I mean, Luminar and Velodyne are both shipping products. And they're shipping them to, among others, in Velodyne's case, automakers who are using them on prototypes, who are using them in test programs, who are integrating their software with their own systems. And not just automakers, but some of these start-ups we've talked about developing self-driving tech as well.

These are real companies, shipping real products. They don't have tons of revenue yet, but they have products in a category that could see widespread adoption among motor vehicles in the next five to 10 years; that's for real. In that sense, again, they're not going to go to zero here; they are real companies.

Are they worth their valuations? That sort of depends on what you believe about the adoption curves and so forth. I would say both Luminar and Velodyne look like solid bets to do well out of the emerging wave of automotive technology. Velodyne has some eggs in other baskets as well with robotics and so forth, some partnerships with companies doing sidewalk robots and loading robots. And I don't remember the name of the company, I mentioned it earlier, a company that makes a robot that crawls through vents spaces and so forth, [laughs] you know, and tells you what needs to be cleaned, where the problem is or whatever. You know, these are all important innovations.

How big are any of the markets? Probably not as big as autos, but it diversifies the business a little bit, whereas Luminar is an autos, autos, autos, trucks, autos bet; including trucks and autos. And both of the companies seem well-positioned right now. But again, it's a space where there isn't a big market yet and the time between now and when that big market emerges, could see other players come in here or other technologies move in here.

Sciple: Yeah. So, for the listeners, I would say, pay attention, this is exciting technology that has lots of potential, but be aware that there's still plenty of execution risk between now and these businesses really delivering on their valuation.

So, John, before we go away, probably the last show I'm going to have you on here in 2020, we're heading into 2021, we opened the show talking about how crazy the year was for electric vehicles, and just all this development in the automotive space. Are there any trends that you're watching for 2021?

Rosevear: Well, we've talked about a bunch of them. More advanced driver assist systems, electric vehicles, and so forth. But one thing we haven't talked a lot about is connectivity, connected cars. GM is dropping hints that it's making a very big bet on connectivity subscription services to its installed vehicles. I mean, those of you who are familiar with GM products will know they've had OnStar, which was a very simple form of connectivity in their cars for years and years; I think it's been, like, 20 years now since they rolled that out in its simplest form.

More recently, GM is including modems and so forth in nearly all of its vehicles in the U.S. and many in China as well. And the plan is to sell products and services via that, not just over-the-air updates, but subscription services, traffic subscriptions, probably a lot of things that we can't even think of yet because they're kicking around labs. But GM does look primed to make a move into connectivity. And at least a couple of Wall Street analysts think that could create a significant revenue stream for them. And if GM does it, other companies will also do it, and may also be preparing to do it. Because it looks like -- I mean, Tesla has done a little bit in that direction, there's much, much more potential there, I think, for subscription services of various kinds in cars, subscription updates. I think we're going to see a lot more of that in the next couple of years. And that's, I think, going to be something we're talking about a lot more next year for sure.

But again, also, advanced driver assist, self-driving cars, various models of personal mobility, that market has gone a little quiet right now. I mean, I think Uber and Lyft have both -- you know, they ran up and there was a lot of excitement, now, it's like, oh, now we have to have to slog toward being profitable in a sustainable way and so forth. I think you'll see another round of innovation there sometime in the next couple of years, I don't know if it'll be in 2021 or not. It may just be the self-driving taxi fleets, but certainly, more advanced driver assist systems, more technology in the car that is about safety and about complimenting humans, not just replacing them, I think that's going to be a renewed focus over the next couple of years, and the connectivity thing.

Sciple: All right. We'll be watching that as we head out into next year. John, we'll be looking forward to having you on the podcast to talk about it as we have new developments.

Rosevear: [laughs] Thanks very much, Nick.

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.

Thanks to Tim Sparks for mixing the show. For John Rosevear, I'm Nick Sciple, thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

QuantumScape Corporation Stock Quote
QuantumScape Corporation
$28.84 (-4.88%) $-1.48
XPeng Inc. Stock Quote
XPeng Inc.
$55.00 (7.09%) $3.64
Velodyne Lidar, Inc. Stock Quote
Velodyne Lidar, Inc.
$5.52 (0.00%) $0.00
Collective Growth Corporation Stock Quote
Collective Growth Corporation
Luminar Technologies, Inc. Stock Quote
Luminar Technologies, Inc.
$16.30 (-3.15%) $0.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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