TheChek News Flow

Shares of new electric-vehicle makers Lordstown Motors, Nikola and Canoo are holding tight despite a challenging series of speed bumps

Lordstown Motors Corp. RIDE 3.30% , an electric-truck startup, is off to a bumpy start as a public company. In the past month, it said it missed its targets on costs and production, acknowledged it overstated preorders, told investors it didn’t have enough money to start full production and parted with its CEO and CFO.

Yet the company’s investors are rather unfazed: Lordstown’s share price is roughly the same as in mid-May.

The stocks of numerous recently listed electric-vehicle companies are showing remarkable resilience in the face of significant turmoil at their businesses. Lordstown, semi-truck maker Nikola Corp. NKLA -2.94% and electric-car maker Canoo Inc. GOEV 0.40% all have share prices that are in line with, or above, the prices from when they struck deals to go public by merging with special-purpose acquisition companies, or SPACs, last year.

Nikola has a market capitalization of $6.5 billion, up more than 60% since it struck its deal to list last year. Months later, the company’s executive chairman resigned after a short seller accused the company of misrepresenting its technology. The company, which denied allegations of fraud, then scuttled multiple new types of vehicles it previously advertised as key to its business, and a partnership with General Motors Co. largely fell apart.

Canoo announced this spring it dropped numerous aspects of its business plan that it sold to investors months earlier, and its CEO, CFO and co-founder all left the company. It has a roughly $2.4 billion market capitalization, unchanged from when it struck the deal to list publicly. None of the three companies have begun commercial production of vehicles.

Helping explain the seemingly unshakable shares is the flood of amateur investors who bet on stocks of new car makers that went public through SPACs in the past year, analysts and observers of the sector say. Motivated by the promise of fast growth and optimism about an electric vehicle-filled future, these individual investors helped push the shares of numerous new companies in the sector to historically lofty valuations by traditional auto maker standards.

It is unclear exactly how much of the electric vehicle companies’ trading is affected by amateur investors versus hedge funds and Wall Street institutions, which also own some of the stocks. Some traders have placed bets that companies in this sector will drop in value.

The resilience of these stocks has befuddled many watching the industry.

“Normal fundamental and economic analysis would lead you to a pretty dire outcome” for some of the companies, said Jon Lopez, an analyst who covers the new-electric vehicle companies for Vertical Group. But the financial world is awash with money and starved for investments that grow quickly, he said, leading to strange outcomes like this year’s Reddit-fueled rise of so-called “meme stocks” that were boosted by investors who posted calls to send shares of certain companies “to the moon.”

The dynamics at play are similar to Telsa Inc., the electric-vehicle company run by Elon Musk that has more than quintupled in value since early last year to become the world’s most valuable auto maker, said Bradford Cornell, a professor emeritus at University of California Los Angeles’ business school. Tesla’s share price often goes up for little clear reason, while negative events often have little or no impact. Investors are more focused on a future narrative of extraordinary growth than the present day-to-day, he said.

“Is the narrative still believable? If it is, there’s no reason why it can’t go up,” he said of these companies’ stocks.

Lordstown, Nikola and Canoo each have expressed optimism about their businesses, saying they are pointed in the right direction after recent turbulence. Executives at all three have highlighted significant progress even amid their struggles—a development that seems to have tided over investors.

Lordstown executives said this week they are still on track to start producing some pickup trucks this fall, and demand appears to be strong. The company is in the process of seeking new funding. Nikola has said it is on track to deliver its first electric trucks later this year, and recently struck a deal to raise another $300 million.

Numerous companies in the electric-vehicle industry are “trying to get through SPAC puberty,” said Tony Aquila, Canoo’s chief executive and chairman. After joining the board last year, Mr. Aquila scrapped multiple aspects of Canoo’s business plan, including a plan to rent most customers cars month by month—changes he said he made to bring Canoo’s business in line with what’s achievable. He said he wants to Canoo “underpromise and overdeliver.”

The stocks of Lordstown, Nikola and Canoo are down significantly from their highs, although the same is true for the shares of other electric-vehicle makers, as the market for high-risk stocks has cooled since a burst of enthusiasm late last year. The stocks of the three electric-vehicle makers also haven’t been immune to bad news, but the dips on concerning revelations were less than many analysts expected, and the share prices often recovered many of their losses.

The buoyant environment helped allow a burst of electric-vehicle startups to collectively raise billions of dollars with ease in the past year through mergers with SPACs. They quickly became appealing for early stage startups in hot sectors like electric vehicles; SPACs allow startups to freely talk about their future projections and plans, unlike a more heavily regulated initial public offering.

Lordstown was a prime beneficiary. In its investor presentation from last summer, it highlighted how it would make an electric pickup that would be far less costly than a gas-powered Ford F-150. There was already strong demand from a long list of customers who preordered the truck, the company said, and production would take relatively little investment because the plant Lordstown got from General Motors wouldn’t need much renovation.

Those plans have unraveled.

Costs of outfitting the plant—which was previously used to build a gas-powered sedan—proved far higher than expected. Ford announced an electric F-150 that was priced more than 20 percent lower than Lordstown’s truck. The company acknowledged some preorders were made by prospective buyers who didn’t appear to have the resources to buy the trucks, and said it received a subpoena from the U.S. Securities and Exchange Commission on the issue. Plant costs soared while full-scale production was delayed.

Peter Di Pasquale, a 30-year-old engineer from Pasadena, Calif., first invested in Lordstown in April after reading about it online, believing it would be able to produce a solid truck. He said he’s aware the company has significant risks, and the management tumult in the past week was concerning. Still, the company is nearing production of its pickup, giving it a leg up on other manufacturers that are months or years behind.

“The factory is real,” he said. “The workers are real.”

“I’m cautiously optimistic.”

Company pledges to cut CO2 emissions are at odds with high-polluting private aircraft

Flying executives around the world in private planes does not chime well with company pledges for a low carbon future. Yet Facebook, Visa and others cannot seem to shake the habit. Chief executives like the convenience and privacy that private jets afford. There is also the incentive of avoiding fellow travellers who might have Covid-19.

Aviation consultancy WingX Advance data shows that on a seven day moving average basis, private flights have now recovered to 2019 levels. Commercial flights are still at about half the usual level. 

Private jets such as the Gulfstream G650ER and Bombardier BD-700 Global Express impress fellow high-rollers. But they are both more expensive and more polluting than commercial air travel.

For those considering a summer trip, aviation consultancy RDC calculates that a flight of about 900 miles from London Heathrow to Ibiza on a typical Airbus A320 emits about 16.5 tonnes of CO2. If the flight is full this works out to just under 100kg of CO2 per seat.

Compare that to an eight-seater business jet, which would produce about 6 tonnes of CO2 over the same distance. Each passenger in the private plane would account for 750kg of CO2. The private jet passengers would still be responsible for more than twice the emissions of a first class passenger in a commercial plane, who take up the space of two or three economy seats. 

Companies are aware that shareholders dislike executive jets. Until now, the focus has been on cost. In 2019, Emerson Electric’s fleet of private aircraft drew criticism from activist investor DE Shaw. Mark Watson left specialist insurer Argo Group after accusations of undisclosed perks including use of company money for his jet-set travels. Former General Electric chief executive Jeff Immelt generated headlines for travelling with two jets, one of them a back-up.

In an era of ESG activism, expect executive jets to become a serious embarrassment to public company owners. Previously, company spinners justified high financial costs with savings of time and stress for chief executives. Now, big carbon emissions are another black mark against corporate aircraft.

If anyone still had questions about President Biden’s view on tech regulation, they have now been answered. The president made his position crystal clear this past week by naming Columbia Law School Professor Lina Khan as the new chair of the Federal Trade Commission. The appointment came hours after the Senate confirmed Khan as a commissioner. It’s a bold choice for the White House, and one that puts the regulatory agency in the hands of a vocal tech critic.

The FTC move came just days after a bipartisan group of House members introduced a package of five bills intended to rein in the power of tech, particularly, Amazon.com (ticker: AMZN), Apple (AAPL), Alphabet (GOOGL), and Facebook (FB). The bills could force the radical restructuring of some or all of the companies.

As an investor, it’s tempting to ignore the developments. After all, the tech giants have been battered by the threat of litigation, regulation, and legislation for years, and yet their stocks have continued to climb. Shareholders have been rewarded for ignoring the clamor.

But storm clouds are gathering.

Khan, a 32-year-old attorney just four years out of Yale Law School, has packed a lot into her short career. In January 2017, while still a law school student, she published a now famous article in the Yale Law Journal, “Amazon’s Antitrust Paradox.” The paper is a blueprint for regulating tech. Khan argued that the historic focus on potential consumer harm, rather than aggressive competition, “underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive.”

Last year, Khan served as counsel to the House Judiciary Committee’s antitrust panel during its investigation of digital markets. She got prominent credit in the final report, which was 450 pages and took aim at the tech giants—“the kinds of monopolies we last saw in the era of oil barons and railroad tycoons.” The committee found that “these firms have too much power, and that power must be reined in and subject to appropriate oversight and enforcement. Our economy and democracy are at stake.”

Khan also recently co-wrote a paper in the University of Chicago Law Review with outgoing FTC Commissioner Rohit Chopra. They proposed that the commission should dust off a little-used rule-making power under a clause of the FTC Act that covers “unfair methods of competition.” The paper argues that FTC regulation has historically relied too much on litigation—and that it would be better to issue new rules. The paper is not a riveting read, but for insights into how Khan might run the FTC, it’s a page turner.

Berin Szóka, president of TechFreedom, a Washington-based think tank, says he was stunned by Biden’s decision to name Khan as chair. That said, he says it’s consistent with “the appetite for radical change on internet regulation.”

Szóka notes the remarkable ease of Khan’s confirmation in the Senate—a rare bipartisan vote of 69-28, despite her association with the more progressive wing of the Democratic Party. “It tells you we’re in the middle of a full-blown techno panic about the internet,” he says. “Republicans are angry at big tech, so they voted for her.”

Szóka says that Khan could transform the FTC into a far more activist body and points to the aggressive rule-making style last seen in the late 1970s during the Carter administration, when the FTC was led by Michael Pertschuk. “Pertschuk led the FTC on a rule-making bender,” Szóka says.

Szóka adds that Khan and the FTC will face “enormous political pressure” to use the rule-making power to adopt ideas Democrats can’t get through Congress.

One caveat, Szóka says, is that Khan will need three votes on the five-member commission to make any progress, and current member Chopra has been nominated to run the Consumer Financial Protection Bureau, pending Senate confirmation. His departure could result in a deadlocked FTC in the near-term; Biden hasn’t yet nominated a replacement for Chopra.

A cross section of Wall Street is coming around to the idea that something has changed with tech regulation. Blair Levin, policy advisor to New Street Research and chief of staff at the Federal Communications Commission under Reed Hundt in the late 1990s, says a period of benign neglect toward tech companies is over. He thinks one of the various efforts to contain the power of big tech will eventually break through. By the second half of the decade, Levin says, there will almost certainly be real changes to antitrust rules.

Mark Mahaney, who follows internet stocks for Evercore ISI, estimates that market values for the largest tech stocks have been trimmed by about 10% to reflect the uncertainty created by potential regulation.

He thinks the attention has already reduced tech M&A activity. “There’s one less tool in your tool kit to grow your business,” he says. And while the House bills are intended in part to defend small companies, Mahaney says the bills could reduce the number of potential acquirers, in effect reducing small-company valuations, as well.

So far, tech stocks haven’t reacted to Khan’s emergence as head of the FTC. The Nasdaq Composite outperformed the S&P 500 this past week.

Ted Mortonson, tech sector strategist at Baird, says that investors tend to view the developments as simply the latest chapter in an old story. Regulating technology, he says, is “not a new concept.” That’s true. But one of big tech’s most accomplished detractors is now its leading regulator. And that’s a new new thing.

Fewer people took road trips or used cosmetics during Covid-19 lockdowns. That’s changing as people are vaccinated and head out of their homes—which is likely to boost demand for the London-listed company’s products—as well as its earnings and share price.

Jarek Pominkiewicz, an analyst at Jefferies, estimates that the shares (ticker: ELM.UK) will rise to 1.70 pounds sterling ($2.39), while Sebastian Bray, an analyst at broker Berenberg, forecasts £1.60, on the company’s strength in its core coatings business, which puts gloss into paint. Shares traded at a recent £1.52, and are up 30.7% this year.

“Over half of earnings will likely come from coatings in 2020,” Bray wrote in a note. “This is an industry that has been quick to recover from the Covid-19 crisis, and Elementis trades cheaply versus peers.”

Margaret Schooley, an analyst at Stifel, wrote in a note that sales are also set to increase in the company’s personal-care business as customers restock supplies.

Elementis, which has a market value of £908 million, employs 1,450 workers. It fetches a multiple of 20.7 times this year’s expected earnings and is valued at a 10% discount to its peers.

In calendar 2020, Elementis had sales of $751.3 million, and swung to a $68.8 million loss from a pretax profit of $61 million in 2019, due to weaker industrial production.

CEO Paul Waterman tells Barron’s, “I am encouraged by the momentum in the business, which is expected to deliver an improved financial performance this year alongside a reduction in leverage.”

Elementis has “strong, global platforms” in its personal-care, talc, and coatings businesses, he says, adding that the company is “well positioned to capture growth and generate significant shareholder value.”

The business is more than 150 years old and used to be called Harrisons and Crosfield because it was formed by two brothers, Daniel and Smith Harrison, and Joseph Crosfield, to trade tea and coffee. It became a global trading company as purveyors of timber, oil palm, and rubber.

As global economies pick up, early data show strong demand for new automobiles, and the market for chromium—which gives a polished mirror finish to steel—seems to be recovering nicely.

“Should it return to the level achieved during the last big recovery from recession, the post-financial-crisis recovery level of 2010, there would be $10 million further upside to our forecasts,” says Berenberg’s Bray.

In May, Elementis posted a better-than-expected first quarter update, in which revenue rose about 6% from the prior year period and customer demand increased.

The update should give investors confidence that 2021 earnings will be strong, and it could tempt back old suitors or attract new ones. At the end of last year, Elementis rejected three offers from U.S. rival Minerals Technologies (MTX), and a £929.3 million cash and stock offer from U.S. chemicals firm Innospec (IOSP). It dismissed the approaches as significantly undervaluing the company.

If Elementis drives growth through strong sales or attracts a premium bid, shareholders could well see their investment shine.

All eyes will be on Vivendi SE on Tuesday as the French media conglomerate’s plans to spin off 60% of Universal Music Group go to a shareholder vote.

Vivendi SE’s (ticker: VIVHY) spinoff of UMG—which includes storied recording labels such as Capitol Music Group and Def Jam Recordings, and artists such as Lady Gaga, Taylor Swift, and Billie Eilish—has attracted the ears of the activist community.

Bill Ackman’s special-purpose acquisition company is set to acquire a 10% UMG stake—valuing the label at roughly $40 billion. It’s a departure from the traditional SPAC model because, instead of creating a new publicly traded company, Ackman’s SPAC will distribute Amsterdam-listed UMG stock to shareholders and use the remaining cash to pursue other deals. Even though the deal differs from the usual SPAC structure, it will still be the largest SPAC deal if completed.

But Ackman isn’t the only investor sniffing around the UMG spinoff. Artisan Partners, which is Vivendi’s 11th-largest shareholder, opposes the deal, calling it tax-inefficient for shareholders, Bloomberg reported. BlueBell Capital Partners raised similar objections, telling Barron’s that the way the deal has been structured is “suboptimal” for investors.

Also in the mix is Dan Loeb’s Third Point, which holds shares and is evaluating the deal, sources familiar with the hedge fund confirmed. Third Point hasn’t indicated how it will vote. Vivendi declined comment.

It remains to be seen how the spinoff will play out.

Baillie Gifford, the Edinburgh-based money manager, has built a stellar investment record over more than 110 years by separating signal from noise. The firm invests in public and private companies with long-term growth potential, irrespective of macroeconomic variables and short-term market moves. Its long-term investment horizon and ready familiarity with new technologies made Tom Slater, head of U.S. equities and a portfolio manager of its U.S. equity and long-term global growth funds, a natural choice to join Barron’s recent Centennial Roundtable, whose members were charged with imagining the next 100 years.

Consider the edited interview below a continuation of that conversation, but with a focus on companies that offer the most exciting investment opportunities now. Slater is joint manager, with Barron’s Roundtable member James Anderson, of Baillie Gifford’s Scottish Mortgage Investment Trust (ticker: SMT.UK), with roughly 18 billion pounds sterling ($25 billion) under management, and co-manager of the $145 million Baillie Gifford U.S. Equity Growth fund (BGGSX). Both carry five-star ratings from Morningstar. Scottish Mortgage shares rose 99% in the 12 months ended on March 31; U.S. Equity Growth’s total return was 73% in the year ended on June 15, placing it in the top percentile of Morningstar’s large-growth category.

Tom Slater: We don’t focus on short-term movements in stock prices. We focus on interesting companies with long-term opportunities. Our average holding period is five to 10 years. It is only over that sort of time horizon that fundamentals drive the share price.

Many people are focused on trying to predict economic variables. They are inherently extremely difficult, if not impossible, to predict. At the same time, there are a lot of predictable trends—in communications, computation, machine learning, energy generation and storage, gene sequencing, and synthetic biology. We focus on predictable trends and the opportunities they create.

The cost curve of genetic sequencing has declined far more dramatically than the cost of computing power under Moore’s Law. Now, cost reductions are expanding into adjacent areas. Gene sequencing is generating huge volumes of healthcare data. The cost of processing and storing this data is falling rapidly, as is the cost of applying machine learning to the data. One adjunct is our ability to start printing [copying] DNA or RNA. Moderna [MRNA] is printing RNA sequences. We’re talking about programming biology, only instead of coding with ones and zeroes, it’s Gs, Ts, As, and Cs [guanine, thymine, adenine, and cytosine—sequenced nucleobases that form the genome].

Moderna’s ability to produce a safe and effective vaccine based on messenger RNA should increase one’s conviction in the company’s ability to produce vaccines to treat other huge, unmet needs, such as HIV/AIDS. Ginkgo Bioworks, another synthetic biology company, is coming public through a merger with a SPAC [special purpose acquisition company]. It is writing strings of DNA code that can be used in biological manufacturing processes.

When a technology undergoes a radical change, not just the evolution of an existing paradigm, it is often difficult for incumbent companies to embrace that change. It is much more likely that this technology will empower new businesses and new business models. That has been the case in the automotive industry up until now with the development of electric vehicles, or EVs. Interestingly, drug companies with big vaccine franchises haven’t come up with effective Covid-19 vaccines.

Speaking of EVs, Baillie Gifford has trimmed its stake in Tesla [TSLA] to less than 2% of the company’s shares from a peak of more than 7%. What prompted this?

Tesla remains a large holding. Partly, the selling reflects the strength of the share price, and the company’s operational success in driving that. And partly, it’s just thinking through the probabilities for upside from here.

China is the world’s largest automotive market, and I would be surprised if there wasn’t a domestic Chinese challenger to Tesla. We’re an investor in NIO [NIO], which has an opportunity to be that player.

What are the characteristics that make Tesla so interesting? There are 100 million-plus cars sold each year. It’s a vast market. They have approached it in a unique way, with a founder CEO with a significant component of his own wealth tied up in the company. Tesla has doggedly pursued a long-term vision, not worrying too much about what the stock market thinks. There have been 10 occasions during our period of ownership when the stock dropped by 30% or more.

Moderna has a platform technology with a broad-enough application to be interesting. Illumina [ILMN], which makes genomic sequencing machines, has a similar opportunity. Chinese companies such as Meituan [3690.Hong Kong] in local services, and Pinduoduo [PDD] in the grocery category, are fascinating, partly because of the scale of their ambition. They are increasingly changing the entire supply chain in their industries. Delivery of prepared foods in Western markets began as a replacement product for takeout. The scope is so much greater in China. There is more of a culture of eating prepared food. Kitchens designed in apartment blocks in China are getting smaller, and those apartment blocks are being designed with the service infrastructure for efficient food delivery. As you build a reliable rapid-delivery infrastructure, there are adjacent categories.

ByteDance is also fascinating. TikTok [its social-media subsidiary] has generated controversy in the U.S., but ByteDance is 95% about China, and how rapidly the company has scaled the domestic advertising market. In China, very large businesses with founder leaders are taking advantage of the scale of the domestic market.

We want to invest in companies led by people who optimize for long-term outcomes. That is more common in founders, although that’s not to say you can’t get it in professional CEOs.

Francis deSouza has been CEO of Illumina since 2016. The company has a large revenue base; it is very profitable, and growing in a predictable way. Last year, Illumina bid $8 billion for Grail, a pre-revenue developer of cancer blood tests, based on where it sees this market going in the next five to 10 years. The stock market didn’t like it, but this is exactly the type of move that founders make.

Privately held companies like ByteDance and SpaceX are valued in the tens of billions of dollars. SpaceX is trying to reduce the cost of access to space by several orders of magnitude, and is creating a new market: commercial access to space. We are also an investor in Relativity Space, which is using 3-D printing to build its rockets.

We’ve been Amazon shareholders for 16 years. Prior to last year, any reductions made were in the interest of diversification within a fund. But Amazon remains a big holding for us. It still has some big opportunities ahead. Grocery is one; it is a huge category that is slowly moving online.

On the other hand, Jeffrey Bezos stepping back from the CEO job is an important factor in our analysis of the company, together with the recent retirement of Jeff Wilke, who ran the consumer business. [Bezos will become executive chairman on July 5.] If you believe that Bezos’ vision and drive have been important in getting Amazon to this point, even a partial step back is a reason for more caution.

Lemonade [LMND] began as a seller of renter’s insurance, which lends itself well to online distribution—specifically, mobile-device distribution. The company created a great consumer experience. It allows customers to nominate a charity to receive the excess float in their insurance pool. That creates an incentive not to overstate a claim. Renter’s insurance is usually the first insurance product someone will buy. If the experience is great, they’ll think about buying the same brand of pet or car or homeowner’s insurance. Lemonade is building a modern technology stack in an industry with large incumbent players still running on mainframes.

We recently invested in 10X Genomics [TXG] and Recursion Pharmaceuticals [RXRX]. The common theme, again, is applying information technology much more efficiently than incumbent companies have done.

Affirm Holdings [AFRM] also fits this theme. Point-of-sale lending traditionally has been a bad experience for consumers, with high interest rates and high penalties if you miss a payment. By using technology, Affirm has created a more consumer-friendly experience, which is driving greater adoption of the service. The model has a long runway.

Whether a company is currently making a profit or not is almost tangential to how much value is being created. Take a software-as-a-service company. Signing up a new customer might cost a lot of money in year one. But the revenue stream generated by that sale could last decades. As an investor, I would want the company to sign up as many customers as possible, which means they’re going to lose a lot of money at the outset. But if they can hang on to those customers, the value creation could be massive.

And so it begins.

No one was expecting much from the Federal Reserve this past week. The “dots” were expected to move, but rates weren’t predicted to rise and no one was expecting a start to tapering. Instead, the process of tightening monetary policy looks to have finally started—along with a long awaited stock market correction.

It didn’t look that way immediately following the end of the Federal Open Market Committee meeting on Wednesday. The Fed’s dots suggested that the first rate hikes would occur in 2023, that there would be two of them, and that most of the governors agreed with that view. That was a change for a central bank that had been promising to remain on hold until the job market had recovered and inflation remained persistently above 2%. It wasn’t an enormous one, though, and the market took the news in stride.

Something changed on Thursday, starting with a disappointing jobless claims report. In his press conference Wednesday, Fed Chairman Jerome Powell seemed fairly certain that the job market would recover quickly enough to justify the new rate-hike schedule, and that the Fed wouldn’t have a problem getting people employed and managing inflation. But the jobless claims seemed to suggest that maybe that won’t happen. The two-year Treasury yield spiked while the 10-year yield fell, suggesting that rate hikes might outpace growth, a frightening thought for a market that had been assuming the Fed would let the economy run hot.

Even that might have been fine—but on Friday, St. Louis Fed Chairman James Bullard started talking. He said the Fed has started discussing tapering and would meet its inflation goals this year or next—and that there is upside risks to the Fed’s inflation forecasts. Essentially, he said that the tightening process had begun. “Bullard made it clear the process has started,” says Ironsides Macroeconomics’ Barry Knapp. “He didn’t leave any doubt.”

The market apparently agreed. The S&P 500 fell 1.9% to 4166.45 this past week, its worst since February, while the Dow Jones Industrial Average dropped 1,189.52 points, or 3.4%, 33,290.08, its worst week since October 2020. The small-cap Russell 2000 slumped 4.2% to 2237.75, its worst since October. And there’s likely more to come. “There’s no way to [tighten policy] without some risk-off episode,” Knapp says.

The selloff has been particularly painful for companies that benefit from faster economic growth. The Materials Select Sector SPDR exchange-traded fund (XLB), home to Freeport-McMoRan (FCX) and Dow (DOW), slumped 6.3%. The Industrial Select Sector SPDR ETF (XLI), which includes Caterpillar (CAT) and General Electric (GE), dropped 3.8%. Which all makes complete sense. If the economy is going to grow at a slower pace, then their earnings probably will too.

“Cyclicality is being repriced,” says Christopher Harvey, U.S. equity strategist at Wells Fargo Securities. “Eventually, we think there is a buying opportunity here. We’re just trying to find out at what level.”

The Nasdaq Composite, which fell 0.3% to 14030.38, was the only major index to emerge from the week relatively unscathed. And that makes sense, too. Investors had spent much of the year reducing their exposure to expensive technology, discretionary, and communication-services stocks, causing the Nasdaq to underperform the S&P 500 by four percentage points heading into the week. It made up about 1½ percentage points of that in just one week.

Just don’t take it as a green light to jump back into the most expensive, speculative, stocks. Yes, lower 10-year yields are better for them in the short-term, but eventually the Fed will start hiking interest rates, something that even the most disruptive stock might not be able to endure. “Growth stocks still need everything to go right to sustain those valuations,” says Michael Darda, chief economist at MKM Partners.

Maybe all this is nothing. Perhaps Powell will take a dovish tilt when he testifies before the House on Tuesday and make this week feel like a bad dream.

The sprint to develop a self-driving car has turned into a slog, one that leaves drivers no closer to buying one than they were five years ago, when Ford Motor promised a car with no steering wheel by 2021. But amid the broken promises, a fully automated car is closer than investors might realize.

If you’re looking to catch a cab from Las Vegas McCarran Airport and open the Lyft app, you’ll find, among the normal options, a choice for an autonomous taxi. When the car, a BMW 5 Series, pulls up, it doesn’t feel quite like the stuff of science fiction. There’s still a driver in the seat, talking to you as a cabbie would. But then you start to notice little things. The screen, like something out of 1982’s Tron, displaying pixelated jaywalkers, cars, and streetlights. The smoothness of the turns. The steering wheel moving—by itself. And when you pull up to your destination, you realize that it has been the lowest-key life-changing experience you’ve ever had.

Illustration by Tim Reynolds

Investors can be forgiven for having forgotten about the potential for autonomous vehicles, or AVs. Uber Technologies (ticker: UBER) sold its self-driving car business in December with far less fanfare than it started it. Lyft (LYFT) unloaded its AV unit to Toyota Motor (TM) this year. And even Tesla (TSLA) CEO Elon Musk’s promises about the looming arrival of fully autonomous driving have started to ring hollow. Stocks devoted to autonomous driving have dropped roughly 30% year to date, and 50% from 52-week highs, even as the S&P 500 index hit new records.

Yet autonomous driving is closer to reality than ever before. In Las Vegas, some of the newest Lyft robotaxis, built by an Aptiv (APTV)- Hyundai Motor (005380.Korea) joint venture called Motional, are autonomous, with no safety drivers. Lyft plans to add more cities to its AV fleet by 2023. Alphabet’s (GOOGL) Waymo has fully driverless cars on the road in Arizona. And General Motors (GM) is testing its self-driving taxis in San Francisco. The auto industry now has a credible path, backed by capital, to bring AVs to the masses. There are a lot of opportunities for investors, too, just not in the most obvious spots.

Autonomous driving has come a long way from the original Defense Advanced Research Projects Agency, or Darpa, challenge in 2004. SAE International, formerly the Society of Automotive Engineers, defines five levels of autonomy. Levels 1 and 2 offer assistance such as lane-keeping and adaptive cruise control—which makes most new cars these days somewhat autonomous. But when most people think of truly self-driving vehicles, they are thinking about Levels 3, 4, and 5, when the car is really doing all the work. At Level 3, the driver’s seat needs to be occupied, but the occupant doesn’t have to pay that much attention until told to by the car. Level 4 requires no human intervention in some settings, such as cities. Level 5 is true autonomy.

The airport taxi in Las Vegas was Level 4. Lyft has completed more than 100,000 autonomous rides with a safety driver. The driver was there because AVs are new, and Lyft is allowed to operate them on public roads. Casinos are private property. Soon, Motional cabs will make their way through the city to over 3,500 destinations with no drivers at all.

The benefits were clear. The car is a very good driver. It’s patient, signals all lane changes, and doesn’t zip around cars waiting to make right or left turns. It obeys speed limits. The drive is smooth. The cost: $15 to $35, the same as a regular Lyft ride.

AVs like Motional’s are enabled by a host of sensors to help them navigate city streets. There are cameras, which offer a 360° view of the road. Radar, a smaller version of those found in airport traffic-control towers, sees through bad weather and changing light. And then there’s lidar—short for laser-based radar—which is particularly good at seeing objects far off in the distance. All of that information is fed into advanced software in an onboard computer, which deciphers data and makes the ride possible.

None of that is cheap. The Motional-built Hyundai Ioniqs, which will be deployed by Lyft in cities beyond Las Vegas by 2023, might cost $150,000, an amount out of reach for most people. And even if the cars are affordable, there remains the problem of checking and calibrating self-driving sensors and upgrading software. This generation of AVs is commercial vehicles, and they need to earn revenue to justify the cost, putting them in direct competition with the 370,000 drivers for ride-hailing companies, cabs, and chauffeured cars in the U.S. That’s just a fraction of the 270 million or so vehicles registered in America, however. But just as antilock brakes and airbags penetrated the industry a generation ago, automatic emergency braking and adaptive cruise control are becoming standard offerings on many cars today, and more self-driving features are coming.

Don’t expect it to come from Tesla. Musk keeps telling investors—and his Twitter followers—that the company is close to achieving full self-driving. That doesn’t seem to be the case, at least not by SAE standards. Tesla vehicles come with a basic driver-assistance function called Autopilot, which offers adaptive cruise control and lane-keeping assistance. For $10,000 more, drivers can upgrade to what the company calls full self-driving, or FSD, which helps in making highway lane changes and navigating exit ramps—still just Level 2. The kind of full self-driving that Musk touts, which could arrive by the end of 2021, will qualify as Level 3. But even then, drivers will need to be in the drivers’ seats, ready to take over.

There’s a reason for that. Tesla uses optical cameras—and only optical cameras, as of May—to manage the driver-assistance features. Everyone, save Musk, insists that lidar is required to reach Level 4 autonomy. Cost is thought to be one of the rationales for Musk’s cameras-only approach. Depending on the technology, lidar can cost $500 to $1,000 per sensor, doubling or tripling the cost of existing Level 2 systems available on passenger cars. “I think even if [lidar] was free, we wouldn’t put it on,” said Musk on his company’s third-quarter 2020 earnings conference call.

The problem for Tesla investors and the stock is the mismatch between expectations and reality. Morgan Stanley analyst Adam Jonas, for instance, attributes roughly a third of his $900 stock price target, or $300 billion, to “network services” and “Tesla Mobility”—FSD software sales and robotaxis, respectively—even though he doesn’t see the company delivering Level 4 or 5 cars before 2030. ARK Invest’s Cathie Wood sees Tesla’s Level 4 robotaxis on the roads potentially by 2024 or 2025, which is one reason that her target price for Tesla stock for 2025 is $3,000 a share, giving it a market cap of roughly $2.9 trillion. AV confusion is one more thing that investors will have to wrestle with for the stock, which was trading at a recent price of $616.60, having lost about a quarter of its value since mid-January.

Not that Musk is wrong about lidar. It is very expensive. And for that reason alone, the six lidar companies that came public in 2020 and 2021 might find the sales targets they set hard to hit. Together, Innoviz Technologies (INVZ), Luminar Technologies (LAZR), Ouster (OUST), Velodyne Lidar (VLDR), Aeva Technologies (AEVA), and AEye (CFAC) project sales of $4.8 billion by about 2025. The discrepancies between individual company projections are particularly wide. Ouster projects sales of $1.6 billion by 2025. AEye projects just $290 million. Both are targeting similar customers and end markets. Both believe they have leading technology and software. Both can’t be right.

The same six companies expect earnings before interest, taxes, depreciation, and amortization, or Ebitda, of $1.7 billion. That’s an average profit margin of about 34%. The average profit margin for auto-parts suppliers is less than 10%. New technologies can offer superior margins because of the proprietary nature of their technology, or because the importance of the features makes customers insensitive to product pricing. Neither looks to be the case for lidar. Instead, lidar sensors are destined to be commodities, leaving investors betting implicitly on each company’s integration software.

What’s more, car companies are sensitive to feature pricing. An advanced safety system that enables Level 2 or 2-plus autonomy can cost up to $1,200. Car companies are unlikely to adopt lidar, which can cost that much per sensor, as long as prices are that high. History suggests that it could take a while. “It took 15 years to get radar into cars, years for optical cameras,” says AEye CEO Blair LaCorte. “Lidar will be in cars in five-to-seven years.”

The stocks poised to benefit from the shift to autonomous driving are General Motors, majority owner of self-driving car company Cruise, and Aptiv, the auto-parts supplier that has partnered with Hyundai in Motional.

Aptiv began life as Delphi Automative Systems, which was spun out of GM in 1999 and went bankrupt in 2005. Former CEO Rodney O’Neal started the transformation from a low-margin struggling supplier of commodity parts to a higher-margin, higher-growth business, one that now focuses on vehicle electrification and software for autonomous driving.

These days, Aptiv has the products and software capabilities to integrate all of the data coming from the sensors located all over the car. It can sell auto makers a complete Level 2 autonomous-driving system or just the components for one. Today, roughly 25% of sales come from “advanced safety systems,” industry jargon for autonomous-driving features. The balance comes from power and signal products. But there is a natural synergy between both divisions. The more complicated that cars get with sensors and data, the more sophisticated the power equipment they will need.

Aptiv was one of the first companies to put radar in a car, in 1999. The systems cost $3,000 each and were the size of a tissue box. Today’s sensors are smaller and cost in the tens of dollars.

Aptiv stock isn’t quite flying under the radar. The stock has returned about 23% a year for the past five years and trades for 29 times estimated 2022 earnings of $5.10 a share, a premium to the S&P 500’s 20 times, and an even larger premium to the auto-supplier group’s 11 times. But sales are expected to rise about 11% a year on average for the next two years. Sales at large auto suppliers, by comparison, are expected to grow about 7% a year on average.

And none of this takes into account Aptiv’s half of Motional. “If this thing really works, the Motional JV stake...just your share of it, could be worth more than all of Aptiv,” said Morgan Stanley’s Jonas on the company’s fourth-quarter 2020 earnings conference call. He may be right. GM’s Cruise, for instance, is worth $30 billion, based on a Microsoft (MSFT) investment made earlier this year. Kevin Clark, CEO of Aptiv, says Motional doesn’t want to operate a taxi fleet as Cruise might, but that doesn’t mean it can’t. Motional is the hidden asset that represents a cherry on top of a great business. By Jonas’ math, Aptiv could be worth $205, up 30% from recent levels.

General Motors is another option for investors, thanks to its Cruise business. GM owns an estimated two-thirds of the company, making its stake worth roughly $20 billion. That would be nearly a quarter of GM’s $87 billion market capitalization. It also means that the company’s auto business is trading at about seven times 2022 earnings estimates of $6.78 a share.

Most analysts don’t give GM credit for its Cruise business, however. The autonomous-driving business profits are still theoretical, and for now Cruise is consuming, not earning, capital. Still, 90% of analysts covering GM stock rate it Buy. Their average price target is about $71 a share, up about 15% from recent levels. Adding Cruise could boost the target price to about $85 a share, up 41% from Thursday’s close of $60.08. Still, the big reason to be optimistic about GM stock is that the base car business is getting better. Like Aptiv, the hidden AV asset is a bonus on top of an improving business. Cruise was recently approved by the California Public Utilities Commission—the entity that regulates ride-hailing companies—to carry passengers in the state. “Cruise is making great, great progress,” says GM Chief Financial Officer Paul Jacobson.

Missing from the list is Waymo’s parent, Alphabet. Waymo just completed a $2.5 billion round of investment and operates its own ride-hailing network, with robotaxis on the streets of Arizona and plans to roll them out in other cities in coming years. It’s probably worth more than both Cruise and Motional. But even with a $50 billion valuation, it’s still just 3% of Alphabet’s market cap. Alphabet has its reasons for investing in Waymo—Google, in the past, has functioned like a technology incubator—but for now, at least, Waymo is just too small to move the needle.

Self-driving cars are the future—they’re just not the future of Alphabet’s business.