Tesla, Alphabet or GM? A breakdown of the autonomous driving battle and how to trade it

Why Alphabet’s Waymo and GM’s Cruise may be better values than Tesla in autonomous driving right now and how to do a long-term pairs trade using options to play it. Autonomous driving is at a pivotal juncture, with several companies vying for leadership in a sector that promises to revolutionize transportation. While Tesla (TSLA) has dominated the autonomous vehicle headlines with its Full Self-Driving (FSD) system, it may not be the best autonomous driving investment. Google’s Waymo and General Motors’ Cruise appear to lead the way, offering more advanced and reliable technology at compelling valuations. Here’s a breakdown of why Waymo and Cruise may be more persuasive investment choices for those interested in the future of driverless cars. Waymo: A leader in the autonomous race Waymo, a subsidiary of Alphabet , has long been a frontrunner in the autonomous driving sector. It operates commercial autonomous services in several U.S. cities, including Phoenix and Los Angeles, using its Jaguar I-PACE fleet. Soon, Waymo plans to switch to Hyundai Ioniq vehicles as it continues to refine its platform and expand its service areas. Waymo also pushes boundaries with advanced cars with no steering wheel or traditional controls. However, it must adhere to Federal Motor Vehicle Safety Standards (FMVSS) requirements, a challenging regulatory hurdle. Waymo’s strategy involves a comprehensive suite of sensors, including lidar, radar, and optical cameras, which work together to ensure a multi-layered view of the driving environment. This approach is costly, with substantial investment required for equipment like custom telematics, redundancy systems, and sensors, yet it enhances reliability. Waymo’s method also highlights its dedication to safety and precision, marking a significant advantage over Tesla’s FSD, which relies solely on optical cameras. Following Cruise’s recent issues, Waymo is positioned as the clear leader, able to scale more effectively and navigate regulatory challenges. Its cautionary approach to expanding its services, backed by Alphabet’s resources, allows it to refine and perfect its systems for broader rollout, strengthening its foothold in the AV space. GM’s Cruise: Learning from setbacks and moving forward General Motors ‘ Cruise was previously neck-and-neck with Waymo, particularly before the challenges it faced in late 2023. Cruise operates its AV service using a modified Chevy Bolt electric vehicle fleet. The company also developed an Origin vehicle prototype designed for autonomous operation without a driver’s seat or steering wheel. However, regulatory and safety challenges have delayed this project, as current FMVSS standards do not yet allow completely driverless vehicles on public roads. After a major incident in 2023, GM CEO Mary Barra and Cruise’s leadership took a conservative approach, re-evaluating the project and shelving Origin until the regulatory environment catches up. Cruise’s setbacks, however, have been more of a pause than a defeat. The company’s cautious stance now demonstrates GM’s commitment to safety and compliance, which could give it an advantage as a trusted provider of autonomous solutions. Cruise also operates with a similar sensor-rich setup to Waymo, integrating lidar, radar, and cameras, collectively providing a more reliable system than Tesla’s camera-only approach. By adopting this layered hardware model, Cruise aims to produce a safer and more accurate AV experience, which is particularly valuable in densely populated urban areas where it primarily operates. Tesla’s approach: Speed and practicality over redundancy? Tesla’s FSD software relies primarily on optical cameras, supported by advanced AI algorithms to interpret the road environment. Tesla’s founder, Elon Musk, argues that if humans can drive with only vision, cars should also be able to. This approach is appealing due to its simplicity and cost-effectiveness, but has notable limitations. Unlike the multi-sensor setups of Waymo and Cruise, Tesla’s reliance on cameras alone presents challenges, particularly in low-visibility conditions like fog, snow, or harsh sunlight. Critics have also pointed out cases of Tesla’s FSD software malfunctioning, with reports of vehicles mistakenly accelerating or failing to detect obstacles. Additionally, Tesla’s FSD software could face scrutiny from the National Highway Traffic Safety Administration (NHTSA) in the coming years. Suppose regulators decide that Tesla’s camera-only system falls short of safety standards. In that case, it may lead to recalls or stricter oversight, ultimately affecting Tesla’s bottom line and delaying further FSD advancements. Tesla has taken a bold stance on their technological approach, and evidence suggests that it is safer than unassisted human drivers. Still, a potential future, more rigorous regulatory framework poses a possible risk factor for investors. The hardware and AI stack: A key differentiator The advanced sensor suites Waymo and Cruise use come at a high cost. Lidar, radar, optical cameras, and the accompanying AI and telematics systems represent an extensive investment in hardware and technology. These vehicles essentially act as “mobile test labs,” providing invaluable data and experience. The current cost of these high-tech systems is prohibitive for mass-market consumer vehicles. Still, similar trends were seen in early computing, where enormous machines eventually led to more affordable consumer computers. As technology advances and costs decrease, the hardware in today’s AVs could eventually become viable in consumer vehicles. Tesla’s choice to rely on cameras alone is driven by cost reduction, aiming to create a more affordable option for consumers. However, this strategy may limit Tesla’s scalability in commercial autonomous services, where reliability and safety are paramount. Regulatory and infrastructure hurdles Waymo and Cruise also benefit from more conservative regulatory strategies, which may be more sustainable in the long term. GM, in particular, is willing to wait until regulators have established clear guidelines. In contrast, Tesla has often pushed the boundaries of regulation, which could pose risks for future development if regulators clamp down. Moreover, Waymo and Cruise are better prepared for future changes in telematics infrastructure. The upcoming 5G network slicing, which is expected to improve data upload speeds, will be vital for AVs that need constant connectivity. Currently, Tesla’s approach does not capitalize on telematics advancements in the same way as Waymo and Cruise, further narrowing its competitive edge in AVs. The value autonomous driving adds to stock Currently, Alphabet, GM, and Tesla are not generating meaningful revenue from autonomous driving or robotics technology. Some buyers may purchase Teslas over alternatives due to their current autopilot and FSD offerings and the promise of future enhancements. Similarly, GM’s supercruise-assisted driving is widely recognized as one of the best, significantly outperforming offerings from rivals such as Ford and Stellantis. I am a big fan of Tesla products and Elon Musk. He has proven that he can take ideas to reality, even competing against far larger companies with more financial resources and an enormous head start in the car business. I would, therefore, challenge anyone to identify a better technology entrepreneur to lead a business in this area from the same starting point today. The problem for an investor is that these companies are orders of magnitude apart from a valuation perspective. Observing commonly used multiples of these companies, they are so different that TSLA needs a dedicated axis (plotted on the right) as its valuation is much greater than either Alphabet or GM, which are plotted on the primary/left Y axis below… In fairness, TSLA has grown materially in recent years and is the only US automaker that manufactures and sells EVs profitably. Still, the safety of an investment is a function of the price investors pay for it. Let’s look at another example: Price to Sales or Enterprise Value to Forward EBIT. No matter how you look at it, Tesla’s current valuation is pricing in a lot of future growth. Final Thoughts For investors looking at autonomous vehicles, Google’s Waymo and GM’s Cruise provide robust, safety-oriented platforms with promising growth potential. At the same time, Tesla has captured the public’s imagination with its FSD technology. None of these companies are yet generating profits or free cash flow from their robotics and autonomous driving technologies, but investors have already priced in presumed success at Tesla. Alphabet’s valuation currently looks reasonable whether or not their Waymo investment pays off hugely. Waymo, should it succeed, is just icing on the cake. GM needs success from the Cruise program; its current valuation and trading at a mid-single-digit PE ratio suggest it may be existential. CEO Mary Barra’s commitment to it indicates she believes that, too. That low multiple does provide a margin of safety on the long side. GM does not need to knock the cover off the ball to prove a good investment. If they can consistently grow at the pace of the global economy, cyclically adjusted, they deserve a much higher multiple. Tesla and Elon Musk, meanwhile, will likely continue to astonish us by using practical solutions while innovating. Still, it will be harder for the stock to rocket higher, given that so much of that is already priced. The trade Much like a “pairs” trade, one way to affect this thesis is to create offsetting positions with similar structures, such as long call spreads on the desired longs and short call spreads on the desired short position. The objective, assuming one chooses to use options rather than simply buying GOOGL and GM and taking the unlimited risk of going short TSLA, is to limit the total risk taken, have long and short positions offsetting one another to mitigate market volatility, and minimize “theta” or options decay net of all positions. Sell Dec. 13 TSLA $260 call Buy Dec. 13 TSLA $275 call Buy Dec. 13 GOOGL $165 call Sell Dec. 13 GOOGL $180 call Buy Dec. 13 GM $48 call Sell Dec. 13 GM $56 call The thesis is not that Tesla will not deliver on their technological promises someday, or a bet against Elon Musk — which is a bit like betting against Secretariat — but rather suggesting that those future achievements are baked into the price of Tesla shares today. DISCLOSURES: (None) Correction: Tesla was misspelled in previous headline. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . 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