Why Intel Now Has a Huge Advantage in Self-Driving Cars

By John Rosevear Markets Fool.com

Tech analysts will tell you that chip giant Intel Corporation(NASDAQ: INTC) is a mixed bag. On the one hand, it's a big player in personal computers, which isn't exactly a growth market. And it has been seen as lagging rivals in the emerging artificial-intelligence space.

Continue Reading Below

But it took a huge step into autonomous vehicles when it announced a $15.3 billion deal to acquire Mobileye N.V. (NYSE: MBLY) earlier this month. I think that makes it worth a closer look. Here's why.

Mobileye's co-founder, Amnon Shashua, announcing a partnership with Intel and BMW last year. Image source: Mobileye N.V.

Why Intel paid a fortune for Mobileye

Intel is paying $15.3 billion for Mobileye, seemingly a huge price for a company that generated just over $358 million-with-an-m in revenue last year. Why?

The key is that Mobileye is the closest thing to a pure play in self-driving vehicles, at least among public companies. Mobileye makes chips and software that process images and that are designed from the ground up to be used in cars. They're already critical components of today's advanced driver-assist systems, and they'll be critical to tomorrow's self-driving vehicles as well.

Continue Reading Below

Put another way, Mobileye has proven technology that will have an important role in the autonomous vehicles of the near future. It also has something else, which might be just as valuable: Credibility with automakers. Mobileye's current client list includes nearly all of the world's automakers.

That's important because the auto industry can be a tough market for a technology company to crack. But Intel won't have to crack it, because Mobileye has already done so. And rather than folding Mobileye into Intel, the chip giant plans to go the other way, keeping Mobileye's sales force and management team intact while expanding its range of offerings to include Intel's products.

Mobileye opens up a huge new market for Intel

So how big is the opportunity for Intel here? As Intel sees it, it's huge. CEO Brian Krzanich thinks of self-driving cars as "data centers on wheels," with good reason. The computer processing power that will be required in cars with the most basic Level 4 self-driving systems is roughly a hundred times the computing power in today's most advanced cars, Krzanich said in a recent presentation.

How Intel's CEO sees the growth opportunity from self-driving cars. Image source: Intel Corporation.

That's a big opportunity for Intel to sell additional hardware to Mobileye's established client list. How big? Krzanich thinks the total addressable market for vehicle systems will be over $20 billion a year by 2020, and could be $70 billion a year by 2030.

On top of that, Krzanich sees a second, related opportunity in the actual data centers that will be needed to provide the "cloud" for all of these interconnected self-driving cars. That won't be a big new market soon, but it could be up around $40 billion a year by 2030.

Whatever its other flaws, Intel is now in a prime position to grab a big piece of that.

What Mobileye does for Intel as an investment

These new autonomous-vehicle markets could represent substantial top-line growth for Intel. Consider that the chip giant generated $59.4 billion in revenue in 2016. If the markets materialize as Krzanich anticipates, and Intel can take even a third of them...then the $15.3 billion that Intel is paying for Mobileye might look like a bargain in time.

As plenty of analysts have pointed out, Intel's fundamentals today aren't very exciting. Its forward price-to-earnings ratio is just over 12, with a forward dividend yield of 3.1% and a payout ratio of 49%. That's all decent but not exceptional.

What might be exceptional about Intel is that it's buying itself a gateway to significant future growth. That's worth a closer look.

10 stocks we like better than Intel
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Intel wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017

John Rosevear has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.