Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Arrow Electronics Is Well-positioned to Cash in on Self-Driving Cars

  • Arrow Electronics has developed a self-driving car technology with many of the same capabilities as the Google Car.
  • Arrow’s semi-autonomous motorcar or SAM project puts it a good position to capitalize on the adoption of self-driving vehicle technology.
  • The market for self-driving vehicles could be $87 billion by 2030.
  • The Boston Consulting Group discovered that over half of drivers would be interested in buying a self-driving vehicle.

If you are intrigued by the idea of the autonomous or semi-autonomous (nerd speak for self-driving) cars but scared by Google Inc.’s (NASDAQ: GOOG, GOOGL) high share price, Arrow Electronics (NYSE: ARW) might be the stock for you.

Like Google, Arrow has developed a self-driving vehicle it calls the semi-autonomous motorcar, or SAM. Arrow has also staged some impressive demonstrations of the SAM technology, including a publicity stunt in which paralyzed former Indy car racer Sam Schmidt drove a Corvette around the Indianapolis Motor Speedway. Schmidt had not been able to drive since being injured in a racing accident in 2000.


The major difference between the Google Car and SAM is that Arrow is developing a set of components that is compatible with existing automobiles. Instead of trying to reinvent the motorcar, Arrow is trying to figure out how to make something it can sell to automakers.

Arrow Targeting Potentially Massive Market with SAM

The demand for such a system could be huge; 55% of auto buyers would like to buy a partially autonomous vehicle, and 44% of buyers said they would buy a totally self-driving car, a Boston Consulting Group poll discovered. The same poll found that 20% of drivers would be willing to pay an extra $4,000 for an autonomous or semi-autonomous vehicle.

Several carmakers, including Daimler AG’s (OTC: DAIY) Mercedes-Benz, Tesla Motors (NASDAQ: TSLA), and the Audi part of Volkswagen AG (OTC: Volkswagen), are working on autonomous or semi-autonomous cars. Audi has even figured out how to make a self-driving car that can race around a track at 190 miles per hour. Mercedes’ self-driving S-Class sedan took a 100-kilometer road trip on public highways in Germany last year.

The money that might be made in self-driving cars is big too; carmakers could spend $87 billion on autonomous vehicle technology by 2030, Lux Research forecast. When you examine these numbers, Arrow’s SAM looks like a potential cash cow rather than a publicity stunt.

Is Arrow a Contrarian or Value Play for Autonomous Cars?

Naturally, contrarian investors will wonder if Arrow is a value play for autonomous cars. It does not make the vehicles themselves or take all the risks of auto manufacturers; instead, it sells the parts to the automakers. Like a classic value play, Arrow is neither well known nor sexy—but does it make money?

The answer is yes; Arrow makes money, and it has a history of successfully selling both electronic components and enterprise computing solutions. Arrow sold $21.4 billion worth of electronic components and solutions in 2013 alone. More importantly, Arrow’s financials demonstrate that it has made a lot of money through such sales. Those financials include:

  • A diluted EPS of 4.608.
  • A quarterly gross profit margin of 13.17%.
  • A quarterly profit margin of 2.25%.
  • A return on equity of 11.35%
  • A free cash flow of $130.28 million.
  • A net income of $466.61 million.
  • Arrow also reported a nice TTM revenue increase of $1.44 billion over the past year. In June 2014 it reported a TTM revenue of $21.96 billion, up from $20.52 billion in June 2013.

An Enterprise Solution for Self-Driving Vehicles

The best way to view SAM is another computing enterprise solution from Arrow. The difference is that SAM is a computing enterprise solution for vehicles. As we noted above, the market for such a solution is potentially vast.

The exciting thing is that automakers, Arrow, and Google have only scratched the surface of this market. The work so far has been with passenger cars, but the potential market for this technology extends far beyond the middle class commuter or handicapped individuals.

Potential users of autonomous vehicles include: rental-car companies such as Hertz Global Holdings (NYSE: HTZ), car-sharing services like Zip Car, taxi-cab companies, school buses, delivery services, online retailers such as Inc. (NASDAQ: AMZN), the trucking industry, the military, bus companies, transit systems, manufacturers, warehouses, railroads, police departments, fire departments, ambulances, governments, and many more.

The technology might also be useful for applications in excavation, mining, demolition, agriculture, and construction. The self-driving bulldozer and farm tractor will surely appear in the near future.

That means companies as diverse as Caterpillar (NYSE: CAT), Ford (NYSE: F), Navistar International: (NYSE:  NAV), United Parcel Service (NYSE: UPS), and Google itself are potential customers for Arrow’s SAM. That makes it a classic Buffett-style value play—the kind of company that is not seen by the public but provides vital services, components, or infrastructure for the industry.

If Arrow Electronics could position itself as a supplier of enterprise solutions for self-driving cars, it could enter a massive new market. More importantly, it is there at the beginning of the market and in a good position to establish itself as a trusted supplier right from the start.

Those that want to get in at the start of a potentially massive new market should take a close look at Arrow. Its SAM project is far more than just a publicity stunt; it could potentially be a massive stream of revenue.