The automobile industry is going through incredible amounts of change, as electric cars are encroaching upon the dominance of internal combustion engine-powered ones and autonomous cars are set to hit the roads in just a few years. Experts believe that as much as 8% of all vehicles sold by 2020 will be electric and perhaps as many as 21 million autonomous cars by 2035.
As the pace of change -- from Detroit to Silicon Valley and everywhere in between -- rapidly increases, investors in the space can see outsized returns, provided they know where to look.
"The transportation market is ready for change," Rob Lutts, president and CIO of Cabot Wealth Management said. "When you have 400,000 people sending a company $1,000 for a car [Tesla's Model 3] that hadn't been developed yet, that told me the world wants a different platform, different engineering and they want a green car."
WATCH MORE: Don't Miss the Coolest Highlights From SXSW 2017
Rapid Change Ahead
Research firm IHS believes that the autonomous vehicle market could reach as many as 21 million sales annually by 2035 and 76 million globally through 2035. It's likely that a good chunk of the autonomous vehicle market will be electric vehicles, with Bloomberg New Energy Finance expecting 41 million electric vehicles sold by 2040.
Lutts believes it could be much larger than that, potentially reaching 80 million cars over the next decade, accounting for between 10% and 15% of all new cars sold around the globe.
Though estimates on the size of the market vary, it's clear that change is coming, as the industry titans -- Ford (F - Get Report) , General Motors (GM - Get Report) and Fiat Chrysler (FCAU - Get Report) -- are doing everything they can to keep up with the pace of change.
Ford recently announced it was buying self-driving car start-up Argo AI for $1 billion as it bets on artificial intelligence. Fiat Chrysler has partnered with Google spin-off Waymo working on autonomous driving. TheStreet's Jim Cramer recently experienced Waymo's self-driving cars, saying there's a good chance self-driving cars could be "standard equipment" by next decade.
General Motors may be the furthest ahead of the Detroit Big 3, in both electric vehicles as well as self-driving vehicles. GM already has the $30,000 (after federal tax credits) Chevrolet Bolt available for sale in certain U.S. markets. It also recently acquired Cruise Automation, another self-driving car company based out of San Francisco, as the race for autonomous vehicle domination wages on.
Too Little Too Late?
But despite the aforementioned moves from Detroit's Big 3 automakers, Lutts doesn't believe they are the likely winners as the industry changes -- their fortunes are too tied to the past.
"They will have viable solutions for electric vehicles, but they'll be too high-priced, too late and they won't have enough features that consumers will want," Lutts said. "They are driven by the internal combustion engine and they can't put the engineering talent to work where they need to."
Lutts: There are no other car companies that have sold electric vehicles at Tesla's volume. I'm amazed the company has said it will build 500,000 vehicles by 2018. I've seen some analysts that think they will produce 250,000 by 2018, so there's a big disconnect there. They may miss the goal by 20% or so, but not by half.
TheStreet: What makes you so bullish on the Model 3? Isn't there a good chance it's not as profitable as the Model S or X, given the lower price point?
Lutts: I think it will be more profitable than the average car. For one, they'll be easier to produce. And once the Gigafactory is completely finished, you'll see battery costs come down even further and putting the Model 3 together will be easier.
It's possible Elon Musk and Tesla are selling more than 2 million cars a year 7 years from now and Ford and General Motors have seen a reduction between 5% and 8% in their market shares. If Tesla can actually produce 500,000 cars in 2018, I think the stock goes to $300 a share, maybe $400. I think Tesla at these levels is still an excellent buy.
Lutts: I think Nvidia is THE autonomous solution. I think they have the most economic way to produce a successful autonomous vehicle. Their engineers have been working on this longer than anyone else.
Unfortunately, I didn't discover Nvidia until it was too late, but they generate $5 billion in revenue from gaming and there is a huge opportunity in autonomous vehicles. Their chips for data centers is growing well over 100% and the virtual reality and artificial intelligence arenas are huge for them.
I think you can compare them to where Intel (INTC - Get Report) was in the 1980's as the PC market was just starting to grow dramatically. Intel had the secret sauce to make PCs successful and Nvidia has the best GPUs.
TheStreet: But the stock has run nearly 400% over the past year and after the last earnings report, which was a strong report, the stock fell. What does that tell you?
Lutts: I would not be surprised if Nvidia grew revenue between 50% and 100% for the next five years. It trades at 29 times 2018 earnings and 25 times 2019 earnings, which I think is very conservative.
I think the share price is excellently valued for the future. You're going to have violent corrections of between 15% and 20% now and then. The stock was at around $60 in September and it zoomed to $120. I don't know too many companies that are in the position Nvidia is in.
TheStreet: What about Mobileye (MBLY) , which is your next pick?
Editor's Note: (This interview happened prior to Intel announcing on March 13 it would acquire Mobileye for $63.54 in cash, valuing the company at $15.3 billion).
Lutts: We've done well with it, but it doesn't have anywhere near the characteristics Nvidia has. They dominate the advanced driver assistance systems (ADAS) market, owning around 80% of it. It's fairly early in the cycle for this and I think this is a viable solution.
I'm not sure if they will reach full autonomy (known as Level 5), but Mobileye has a good shot. It's a big part of the autonomous revolution, which I think is going to happen faster than people think. Accidents with ADAS systems are much lower and I think it will be the insurance companies driving the regulatory environment on this. I've seen estimates that could lead to a reduction in insurance claims from 14% to 35%, all because of ADAS.
TheStreet: Isn't there inherently a risk though that automakers come up with their own solutions and cut Mobileye out?
Lutts: That's that's the big risk, that manufacturers cut them out. However, I still think that Mobileye's camera system will be an important part of autonomous cars.
Editors' pick: Originally published March 15.