Last week in Investing For The End Of Oil, I considered the investment implications of a near-term peak in oil demand. In that article, I wrote about some of the companies that might benefit from a potential explosion of electric vehicle (EV) demand. 

Today I want to talk about another potential disruptor — the autonomous vehicle (AV) — which I think is going to be a very big deal. 

In fact, as I was preparing to write this article, I had a fortuitous chance encounter with a business acquaintance. He mentioned to me that there is a group of exchange traded funds (ETFs) that are focused on disruptive technologies (ARK Active ETFs). He knows the portfolio manager for the ARK ETFs, Catherine D. Wood, and I was offered the chance to connect with her team.   

These funds are based around several themes. One is the ARK Industrial Innovation ETF (NYSEARCA: ARKQ), and it currently has investments allocated in the following areas:

• Autonomous Vehicles (31%)
• 3D Printing (31%)
• Robotics (24%)
• Energy Storage (9%)
• Development of Infrastructure (3%)
• Space Exploration (2%)
• Alternate Energy Sources (1%)
• Innovative Materials (0.1%)

The fund’s Top 10 holdings are at present:

Last week I spoke with Tasha Keeney, a thematic analyst on ARK’s Industrial Innovation team who covers AVs and 3D printing.

Tasha indicated that they think EVs are slowing oil demand, which could peak in the next decade. Because they believe that most AVs will be EVs, more miles will be shifted away from oil. They further believe that taxi networks will be how AVs will roll out on a massive scale.

A graphic from an ARK white paper — Mobility-As-A-Service: Why Self-Driving Cars Could Change Everything — shows why the AV could be legitimately disruptive:

Ride sharing services like Uber and Lyft have rapidly taken market share from taxis by being 20-30% cheaper. If autonomous taxis could shave the cost of a taxi ride by 90%, or the cost of owning a personal vehicle by 50%, then this is truly the kind of innovation that could lead to massive changes in our driving habits.

Tasha shared with me a few comments on some of the fund’s investments. 

The fund’s largest holding is Tesla Inc (NASDAQ: TSLA), which is a play on both AVs and EVs. They are the furthest ahead of all competitors and have the clearest path to commercialization. Every Tesla sold today is equipped with the hardware to be fully autonomous. They are the only automaker with this distinction, and they are two to five years ahead of competitors. Tesla has thousands of cars on the road gathering real world customer data.

By comparison, Google — now Alphabet Inc (NASDAQ: GOOGL) has hundreds of cars on the roads. But Google has been working on AVs for over ten years, and their cars perform the best. Reports with the California DMV confirm this. The cars are going 5,000 miles on average between interventions by a driver. Google has spun this project into its own company called Waymo.

I currently live in Chandler, Arizona, which was one of the early test sites for Google’s AV fleet. For the past two years, I have encountered these vehicles on a daily basis. In fact, I took the following picture on my way to work last year:

I still see these cars daily, except now, all the cars are labeled “Waymo.” The ARKQ team is closely watching Waymo’s progress.

Tasha stated that the market will likely form in geographic monopolies because you need data that is local to the area where you drive. As a result, they like China’s version of Google, Baidu Inc (NASDAQ: BIDU). Baidu is China’s leader in artificial intelligence (AI) and is poised to have a significant role in China’s AV efforts.

For hardware components, she mentioned two companies. Nvidia Corporation (NASDAQ: NVDA) produce graphics processing unit (GPUs) that are good at machine learning. Every Tesla has Nvidia inside. The Nvidia Drive PX series is like the brains of the autonomous car, processing information in the vehicle.

The team also likes QUALCOMM, Inc. (NASDAQ: QCOM), which makes hardware components that could be used in these cars. Qualcomm recently acquired NXP Semiconductors, which already has existing relationships with auto companies. With the acquisition of NXP, Qualcomm became the largest semiconductor supplier in autos.

She also mentioned Delphi Automotive (NYSE: DLPH) as a good choice for automakers seeking to quickly get their autonomous vehicle programs off the ground. They also make electronic components that go into EVs.

Finally, among the large automakers, she mentioned General Motors Company (NYSE: GM) and Toyota Motor Corp (NYSE: TM). GM recently acquired self-driving startup Cruise Automation and has partnered with Lyft. They expect to have thousands of test cars on the road with Lyft by 2018. 

Toyota has a great position in Japan. They are aggressively chasing the opportunity, and are making a lot of investments in the space to catch up.

EVs and AVs are of course not mutually exclusive. To the contrary, if AVs take off as projected, it will be a significant driver of EV demand. I won’t trade in my vehicle for an EV any time soon, but I would trade it in immediately for an affordable car that would drive me to my destination.

This is an area that warrants attention from investors.