Market Mad House

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


Is Avis Budget the Future of Automobiles?

I ask is Avis Budget the future of automobiles, because there is speculation car ownership will collapse in one or two decades.

The popular theory is that networked self-driving vehicles owned by corporations will become the preferred mode of transportation for many. In detail, a company will own the autonomous vehicles and lease or rent them to drivers on a per-use basis.

If you only need a car for your weekly shopping trip that is all you could pay for, for instance. To elaborate when you need a car you will use an app to summon a vehicle. The vehicle will haul you to your destination and drive away when you no longer need it.

Car Ownership Makes little sense

Economically, this model makes more sense than individual car ownership because it is cheaper and more efficient. In fact, drivers park the average car in the UK for 96% of the time, researchers John Bates and David Leibling estimate.

Thus people invest vast amounts of resources and money in something that they rarely use. Additionally, cities could reduce traffic congestion by ending individual car ownership. Instead, one self-driving vehicle could serve several people more efficiently than several cars.

For instance, there will be no reason for garages or many parking lots. In addition, many people could avoid the hassles of maintenance, gas, and monthly car and insurance payments.

Thus, car ownership makes little sense from a policy or economic standpoint. Pointedly, most defenses of car ownership make appeals to emotion rather than hard facts. Consequently, we need to ask when not if the private car disappear.

The end of Car Ownership is an opportunity for Avis-Budget Group

Predictions of the private automobile’s demise such as Kara Swisher’s New York Times op-ed are an opportunity for Avis Budget Group (NASDAQ: CAR).

Swisher predicts that the concept of an average person “actually purchasing, maintaining, insuring and garaging an automobile” will end. However, there is disagreement on when the car-less future will arrive.

For instance, McKinsey & Company predicts 10% of cars will be shared vehicles in 2030. Moreover, shared vehicles could be a $1.5 trillion industry by 2030. This is an opportunity for Avis Budget which has been providing shared vehicles; rental cars and trucks, for decades.

Unrealistically, RethinkX claims the number of cars in the US will drop by 80% by 2030, observes. Note; I think this claim is ridiculous, but I believe the McKinsey estimates sound feasible.

Notably, car-sharing services are growing fast. The University of California at Berkely estimates auto-sharing services had 1.9 million members in 2018, notes.

However, the drop in auto ownership attributable to car sharing is small. Only 2% to 5% of Car2Go members sold vehicles because of participating in that service in 2016, UC Berkeley’s Transportation Sustainability Research Center estimates. However, 7% to 10% of Car2Go users did not own vehicles.

Will Avis Budget Dominate Car Sharing?

Avis Budget Group has owned the most prominent American car-sharing service Zipcar since 2013.

Notably, Avis claims Zipcar already has one million members worldwide. Thus, Avis already has extensive experience in car sharing and bringing shared cars to the masses.

Zipcar gives members a card that gives them access to vehicles parked in public places. Members pay an hourly or daily fee to drive the vehicles. Zipcar bills members monthly for vehicle use.

Some cities like Boston now have hundreds of ZipCars parked all over the city, Zipcar’s website indicates. Zipcar’s success proves there is a market for shared cars and it is growing.

Self-Driving Cars and Carsharing

Avis Budget is interested in self-driving vehicles because they could reduce costs.

When Zipcar parks a vehicle on the street, somebody has to look after it and make sure it is safe and maintained. For instance, Zipcar needs to send employees out retrieve vehicles for maintenance and sometimes to return them to the proper parking space.

Theoretically, Avis Budget could base self-driving Zipcars at a central garage. Instead, of staying on the street or in a parking lot, the autonomous Zipcar will drive to the member’s location when she calls it. The Zipcar will drive back to the garage when it is not in use, or when it needs fuel or electricity.

Consequently, Avis Budget is participating in Alphabet’s (NASDAQ: GOOG) Waymo self-driving car experiment in Phoenix. Waymo is testing the use of autonomous Chrysler Pacifica minivans as ride share vehicles. Avis Budget is maintaining some of Waymo’s vehicles, and offering Waymo One rideshare rides to rental car users, TechCrunch reports.

Avis is partnering with Waymo because autonomous vehicles could expand Zipcar’s reach. Autonomous Zipcars could serve suburbs, small towns, rural areas, and outlying regions for instance. Moreover, renters could use autonomous Zipcars for long-distance or cross-country travel.

How Realistic is the Car-Less Future?

There are serious roadblocks to overcome on the trip to the to car-less future.

First, we will need to develop full-self driving (FSD) vehicles. To explain, an FSD vehicle is completely autonomous and capable of safely operating without a driver. There are no FSD vehicles on the market but several companies; including Ford (NYSE: F) and Tesla Motors (NASDAQ: TSLA), claim they could have fully autonomous cars on the road by 2021.

Second, a political backlash could keep FSD vehicles off the road. Rising presidential candidate Andrew Yang (D-New York) is already raising the alarm about self-driving trucks. At least one popular media figure; Fox News talker Tucker Carlson, is echoing Yang’s concerns.

Thus, we do not know if widespread use of autonomous vehicles is technologically, socially, or politically workable. However, the public seems to accept the widespread presence of Zipcars in places like Boston.

Can Avis Budget Dominate the Car-Sharing Future

I think Avis Budget is a good investment because it already has much of the infrastructure for the car-sharing future in place.

Avis claims to offer 600,000 rental vehicles in 11,000 locations in 180 countries. Additionally, Avis already offers over 100,000 Wi-Fi connected vehicles. Plus, Avis has a workforce of 30,000 employees in a position to support those vehicles. In addition, Avis Budget is partnering with ride-sharing leader Lyft (NYSE: LYFT) and Waymo.

Avis subsidiries include Zipcar, Payless, Budget, Budget Truck Rentals, Maggiore, France Cars, Apex, AmicoBlue, and MoriniRent. Consequently, I think Avis is in the best position to cash in on the car-sharing future. However, value fanatics will rightly ask is Avis making money?

Is Avis Budget Making Money?

Currently the answer is no. In fact, Avis Budget reported a quarterly operating loss of -$94 million, and a quarterly net loss of -$91 million on 31 March 2019.

However, Avis Budget did report a gross profit of $283 million on revenues of $1.92 billion on the same day. Yet, Avis Budget reported its revenue growth rate shrank by 2.44% in the last quarter. In addition, revenues fell from $2.05 billion on 31 December 2018 to $1.92 billion tree months later.

Avis Budget Lacks the Resources for Car Sharing

I do not think Avis Budget has the resources or budget to adopt and deploy a radical new technology like FSD vehicles because of its lack of cash.

For instance, Avis had a negative free cash flow of -$910 million, an investing cash flow of -$1.434 billion, and an operating cash flow of $440 million on March 31, 2019. Finally, Avis Budget had just $540 million in cash and short-equivalents on 31 March 2019.

Under these circumstances, I think Avis Budget will have to find a cash-rich partner to deploy autonomous vehicles. Notably, Avis may have such partner in the form of Alphabet (NASDAQ: GOOG). Alphabet had $94.34 billion in short-term investments and $19.148 billion in cash and equivalents on 31 March 2019.

Is Avis Budget an Acquisition Target?

Other potential partners for Avis include automakers. For instance, Ford had $20.848 billion in cash and equivalents and $16.882 billion in short-term investments on 31 March 2019. Meanwhile, the Toyota Motor Corp had $42.737 billion in cash and equivalents and $10.247 billion in short-term investments on the same day.

Thus, Avis could find the money for car-sharing from partners. Moreover, companies like Ford, Toyota, and Alphabet have the money to buy Avis-Budget if they wish. Avis; which has an existing business and infrastructure, will make a better platform for autonomous vehicles deployment than Lyft; or Uber (NYSE: UBER), which are little more than apps.

Under these circumstances, I think the money to make autonomous car sharing a reality is there. All it will take is the political will, and a management dedicated to implementing it.

Is Avis Budget a Value Investment?

Given the potential for car sharing, I think Avis Budget is a good long-term growth and value buy for those who do not need dividend income. In fact, I think Mr. Market underpriced Avis Budget at $36.36 on 15 July 2019.

Unfortunately, Avis Budget pays no dividend, but it has a proven business with a long history. Thus, Avis Budget is an interesting value investing for car sharing.

However, Avis Budget is a risky proposition because car sharing is a new business. Thus, it could be years or even decades before autonomous vehicles and car share make money.

In the final analysis, Avis Budget Group (NASDAQ: CAR), car sharing, and autonomous vehicles are for long-term growth investors only.  Ford will better serve most investors because unlike Avis Budget, it makes money and pays a dividend.