Wall Street strategist Gene Munster first recommended Apple (AAPL -0.35%) stock in June 2004, when it traded at a split-adjusted $0.50 per share. Investors who took that advice have made a lot of money. The stock has since returned 41,710%, meaning an initial investment of $2,500 would be worth $1 million today.
But there is a more interesting story here: After first recommending Apple, Munster made a number of prescient predictions. For instance, he became the first analyst to posit Apple as a $1 trillion company in 2012, a forecast that came to fruition in 2018. He then correctly called Apple's ascent to $2 trillion in 2020, and shortly thereafter, he upped his target to $3 trillion, a prediction that came to pass in 2023.
Suffice it to say Munster has a knack for remarkably good guesswork, and that makes his latest insight quite intriguing. He recently told CNBC that self-driving cars are inevitable. Munster admitted the technology is not quite there yet, but he said Tesla (TSLA -1.11%) and Waymo, a subsidiary of Alphabet (GOOGL 10.22%) (GOOG 9.96%), are the two companies best positioned to win the robotaxi race.
Here's what investors should know about these artificial intelligence stocks.
1. Tesla
The global electric vehicle market is expected to grow at 23% annually to reach $1.7 trillion by 2032, and Tesla is perhaps better positioned to benefit than any other company. Its market share in battery electric vehicles increased 60 basis points to 21.8% through the first half of the year, while its closest competitor BYD saw its market share slip 30 basis points to 15.1%. Tesla also reported the highest operating margin among volume carmakers last year, something CEO Elon Musk attributes to better manufacturing technology.
However, management believes full self-driving (FSD) technology will take margins even higher in the future, and several Wall Street strategists are equally optimistic on how self-driving cars might impact the business. Munster says FSD software could add $20 billion to revenue in five years and push operating profits to $100 billion in 10 years, implying 23% annual growth in operating income over the next decade.
Tesla will also monetize its FSD technology with an autonomous ride-hailing network. It has not provided much detail, but Musk says full autonomy is within reach this year and Tesla plans to mass produce a robotaxi next year. In any case, the company is well positioned to be a leader in the autonomous driving space.
Tesla has more autonomous driving data than its peers, which hints at better artificial intelligence (AI). So FSD technology could catalyze its booming evolution into a high-margin software and services business. Indeed, Ark Invest says robotaxi revenue could reach $9 trillion annually by 2030, and Musk says FSD software could push gross profit margin to 70% (or higher), up from 21.5% today.
Shares currently trade at 8.8 times sales, a discount to the three-year average of 16 times sales, but a very pricey valuation compared to other automakers. Investors that buy into the robotaxi narrative (as I do) should consider purchasing a few shares of Tesla stock today.
2. Alphabet
Alphabet subsidiary Waymo is an autonomous driving company built to disrupt transportation and mobility on two fronts: Waymo One will offer commercial ride-hailing services and Waymo Via will provide autonomous trucking and logistics services. Alphabet was building both segments in tandem, but it recently decided to delay its autonomous trucking timeline to prioritize ride-hailing.
That decision is likely aimed at maintaining its momentum, as Waymo was the first company to commercialize autonomous ride-hailing services. Its robotaxi program went live in Phoenix in 2018, but Waymo One has since branched in San Francisco (2022) and Los Angeles (2023). The company recently named Austin, Texas as its next destination.
Readers may wonder why Waymo is expanding city by city. Waymo uses lidar (a laser-based measurement technology) to create detailed maps before providing ride-hailing services in any metropolis. Its robotaxis need those maps to navigate much like trains need rails to move. The upside to that strategy is speed. Waymo beat Tesla to market. But the downside is the lack of scalability. Waymo must meticulously map and remap each city in which it operates, and its robotaxis will forever be confined by those maps.
Tesla takes a different tack by eschewing lidar in favor of computer vision. The logic there is simple: Humans use only two eyes to drive (no lidar), so a supercomputer with eight cameras should be up to the task, provided the underlying AI software is trained correctly. Tesla has undoubtedly chosen the more difficult strategy, but the benefit is scalability. Once Tesla perfects its FSD software, its entire fleet will become autonomous with the flip of a switch.
However, robotaxis are a small part of the investment thesis for Alphabet. Its primary growth engines are digital advertising and cloud computing. Its Google subsidiary is the largest ad tech company and third-largest cloud services provider on the planet, and both markets are forecasted to grow at 14% annually through 2030. Alphabet should be able to match that pace at a minimum, but sales could grow much faster if other bets like Waymo pay off.
Currently, shares trade at 6 times sales, a slight discount to the three-year average of 6.5 times sales. Investors should feel comfortable buying a small position in this growth stock right now.
