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Why self driving cars could spell disaster for these two insurance stocks

Autonomous vehicles are probably already safer drivers than any humans and the technology is constantly advancing. The main reason that machines are not ruling the roads is because it takes time for regulation to catch up with the technology. This could spell disaster for Direct Line (LSE:DLG) and Hastings Group (LSE:HSTG), which stand to lose a lot of revenue as accidents could become significantly less common. At some point in the not too distant future we could find that legislators deem humans too dangerous to drive on our roads!

Sooner than you think?

Of course this is a speculative prediction, but we have already seen the market begin to react to this as a probable trend. Car insurance stocks have had a tough year with some starting to anticipate difficult times ahead. You may think this is a bit premature, if self-driving cars take 30 years to hit the road, then there is still a good deal of value to draw from these companies. However, I am bullish on how quickly the technology will become accepted, and think we could see autonomous vehicles on UK roads within 10 years. My belief is that Uber, among others, will be responsible for this technology becoming widespread. We have already seen how focused Uber has been in driving costs lower and achieving growth, imagine how excited it must be about the prospect of not having to pay drivers.

Two to avoid

Direct Line also offers home insurance, but this is small compared to its car insurance and recovery services. It is a very good income stock and with payouts in the high single-digits has been one of the highest-yielding stocks in the FTSE 100. It regularly pays three dividends per year. So why the  flurry of broker downgrades this year? That is partially due to industry conditions, but also, I believe, because of the significant risk that is posed by driverless-cars. 

Industry peer Hastings Group has been considerably growing its top-line revenue over the past few years and may be starting look like a bargain. On closer inspection though a lot of this growth is coming at the expense of its margins. This is acceptable in an accelerating market but when there is so much competition, this will only increase the risk to the business in difficult trading conditions.

Both of these companies will probably continue to produce decent returns for years to come but I’d be very concerned about a falling share price.

Can I benefit from autonomous vehicle stocks?

Most of the big players in this market are American companies and unfortunately Uber is privately owned. I’d consider buying AB Dynamics which tests autonomous vehicles and is likely to see a big increase in its business over the coming years, if my predictions are correct. It is trading on a lofty price-to-earnings ratio of 30 but it reported a ‘significant’ earnings beat last week so I think its momentum will continue.

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The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.