Hey, very interesting and well thought out. Doing some analysis on this and going to mention Full self driving vehicles and the impact it will have on car sales. If/when FSD becomes widely available, it may become economical for many consumers to use services like Uber vs owning their own car (This theory is debatable). however, assuming it is, even for a small percentage of the population, It would be a reasonable assumption that this would result in a negative impact on auto dealers. Seems like the industry consensus is we’re still about 10 years out from FSD. But as we know the reality could be 1 year, or in 20 years. All considered, I think the auto dealers are still an attractive industry to invest in for the next few years but will have to keep an eye out on the progress of FSD vehicles and how the economics of a shared car economy play out.
The core question to ask with auto dealers is “how will event xyz impact the service business”? New car dealers derive most of their profits from service.
If an Uber-like fleet of FSD cars is used, who’s servicing them? The mom-and-pop independent repair shop or the franchised auto dealership? And with sensors that need to be calibrated to prevent accidents, who’s servicing the sensors?
And where do these FSD fleet companies choose to keep their cars overnight, when they are not being 100% used? Might make sense to keep many in a dealer parking lot, close to an available service bay (ie, repair them during off-peak hours). Dealer’s would gladly find a way to create night shifts for this extra service business.
I do agree that less cars could be sold in a FSD world but dealers also have an extremely variable cost structure. Less sales people are needed in that world and obviously less sales commissions would need to be paid. Likely less marketing spend required too. But, less fees would be made on arranging loans / other finance products.
Overall, I don’t think it’s perfectly clear what happens to new car dealer profits in a FSD world. Ultimately it seems the same amount of miles will be driven regardless (or maybe more as the fleet has some added movement miles since a pickup person isn’t always located right next to a drop off person). And miles driven is ultimately what creates the need for service.
If you really think through the logistics of it all, I actually don’t think the end-state is quite as bad as many believe. Could be wrong though and I’m no FSD expert, so take my opinions lightly.
Not sure I understand your questions but cars need to be serviced, no matter who owns them. That’s the bigger point here. Uber drivers still service their car. And some future FSD Uber fleet would still need to be serviced too.
Wow, this is a fantastic writeup. I too am a like minded Buffet/Graham/Munger style investor. The car dealership space came across my radar late last year. I did some fairly thorough reserach and concluded that LAD and ABG looked the most attractive to me in terms of valuation, so I bought fairly large stakes in each company in January. I was reviewing an AutoNation writeup on ValueInvestorsClub when I found this page linked in the comments of that AN writeup.
You really helped solidify my thoughts - you clearly have more experience and a deeper understanding of the car dealership industry, while I certainly somewhat violated the circle of competence rule to an extent, but it was comforting reading through this to realize that my thesis seem to hold up even with the extra detail/nuance you provided in this writeup (gotta love a little confirmation bias every once in a while). Anyways, wanted to thank you for posting this publicly as now I better understand my own thesis on the companies in which I hold a stake.
fantastic analysis with lots of insights. great primer of auto dealers! thank you!
Thanks, I'm glad you enjoyed it.
Hey, very interesting and well thought out. Doing some analysis on this and going to mention Full self driving vehicles and the impact it will have on car sales. If/when FSD becomes widely available, it may become economical for many consumers to use services like Uber vs owning their own car (This theory is debatable). however, assuming it is, even for a small percentage of the population, It would be a reasonable assumption that this would result in a negative impact on auto dealers. Seems like the industry consensus is we’re still about 10 years out from FSD. But as we know the reality could be 1 year, or in 20 years. All considered, I think the auto dealers are still an attractive industry to invest in for the next few years but will have to keep an eye out on the progress of FSD vehicles and how the economics of a shared car economy play out.
The core question to ask with auto dealers is “how will event xyz impact the service business”? New car dealers derive most of their profits from service.
If an Uber-like fleet of FSD cars is used, who’s servicing them? The mom-and-pop independent repair shop or the franchised auto dealership? And with sensors that need to be calibrated to prevent accidents, who’s servicing the sensors?
And where do these FSD fleet companies choose to keep their cars overnight, when they are not being 100% used? Might make sense to keep many in a dealer parking lot, close to an available service bay (ie, repair them during off-peak hours). Dealer’s would gladly find a way to create night shifts for this extra service business.
I do agree that less cars could be sold in a FSD world but dealers also have an extremely variable cost structure. Less sales people are needed in that world and obviously less sales commissions would need to be paid. Likely less marketing spend required too. But, less fees would be made on arranging loans / other finance products.
Overall, I don’t think it’s perfectly clear what happens to new car dealer profits in a FSD world. Ultimately it seems the same amount of miles will be driven regardless (or maybe more as the fleet has some added movement miles since a pickup person isn’t always located right next to a drop off person). And miles driven is ultimately what creates the need for service.
If you really think through the logistics of it all, I actually don’t think the end-state is quite as bad as many believe. Could be wrong though and I’m no FSD expert, so take my opinions lightly.
why would in the FSD world be less economical to own (such) a car?
why would be more economical?
If/when FSD becomes widely available, it may become economical for many consumers to use services like Uber vs owning their own car
Not sure I understand your questions but cars need to be serviced, no matter who owns them. That’s the bigger point here. Uber drivers still service their car. And some future FSD Uber fleet would still need to be serviced too.
Wow, this is a fantastic writeup. I too am a like minded Buffet/Graham/Munger style investor. The car dealership space came across my radar late last year. I did some fairly thorough reserach and concluded that LAD and ABG looked the most attractive to me in terms of valuation, so I bought fairly large stakes in each company in January. I was reviewing an AutoNation writeup on ValueInvestorsClub when I found this page linked in the comments of that AN writeup.
You really helped solidify my thoughts - you clearly have more experience and a deeper understanding of the car dealership industry, while I certainly somewhat violated the circle of competence rule to an extent, but it was comforting reading through this to realize that my thesis seem to hold up even with the extra detail/nuance you provided in this writeup (gotta love a little confirmation bias every once in a while). Anyways, wanted to thank you for posting this publicly as now I better understand my own thesis on the companies in which I hold a stake.
Thanks for the kind words. Always great to hear people appreciate the work.
This is incredibly insightful, thank you for sharing