Driverless cars are widely expected to roam public roads within the next decade. Plenty of tech companies and automakers are already investing in this market, but it can be tough to pick out the potential winners.
Today, a trio of our Motley Fool investors will identify three companies that could profit from the growth of the autonomous market: NXP Semiconductors (NASDAQ: NXPI), Aptiv PLC (NYSE: APTV), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).
The world's largest automotive chipmaker
Leo Sun (NXP Semiconductors): NXP Semiconductors fell out of the limelight after Qualcomm abandoned its $44 billion takeover bid last July. However, the Dutch chipmaker remains one of the top players in connected cars.
NXP produces a wide variety of chips, but over 40% of its product revenue came from automotive chips last quarter. Those chips are used for in-vehicle networking, keyless entry, car radios, and other features. NXP notably became the world's largest automotive chipmaker following its acquisition of Freescale in 2015.
NXP also offers an autonomous driving platform called BlueBox. Like NVIDIA's Drive PX platform, BlueBox lets automakers convert traditional vehicles into autonomous ones with an onboard computer.
As vehicles become more technologically sophisticated, automakers will purchase more semiconductors from chipmakers like NXP. NXP, which can group together its chips in cost-effective bundles, should profit from those content-share gains.
NXP's automotive growth was underwhelming in recent quarters, mostly due to softer auto sales and issues in China. However, NXP can still tread water by selling its other types of products (including secure ID chips and mixed-signal chips) as rebounding demand for cars and tech upgrades boost its automotive revenue again.
For now, NXP's stock looks cheap at 10 times forward earnings, and its enterprise value of $28 billion still makes it a tempting takeover target for any tech company that wants to dominate the automotive market. Potential suitors include Intel, NVIDIA, or any other chipmaker with an interest in driverless cars.
Aptiv benefits two ways from driverless cars
Jamal Carnette, CFA (Aptiv PLC): It's likely you've heard of Aptiv, just by a different name. The company was spun off of Delphi in 2017, which itself was spun off of General Motors in the late 90s. Despite its conventional vehicle roots, the company is well-situated to benefit from the rise of self-driving cars, both directly and indirectly.
Aptiv will directly benefit from autonomous vehicles through its partnership with Lyft. Last year, the company started offering a fleet of 30 self-driving vehicles in Las Vegas, and it has completed more than 30,000 rides as of this writing. As Lyft preps for its IPO, look for more focus on self-driving operations since this lowers its cost. It's likely that the currently unprofitable company will seek to bring its self-driving service to more cities in the near future.
However, Aptiv may also benefit more indirectly via its infotainment and user-experience business. The rise of autonomous vehicles will afford riders more time for entertainment like browsing the Internet and streaming movies. Naturally, more automakers will start to provide such options, and Aptiv will benefit from more car technology.
Aptiv's stock is up more than 30% this year, mostly on account of a strong annual earnings report in which the company reported a 10% revenue increase. While there is fear on account of a possible slowdown of automobile sales, the company will continue to grow its top line by placing more technology in each car. Aptiv is well-situated to benefit as the driverless car wars heat up, so look for the stock to continue to climb higher as a result.
Set a new waypoint
Demitri Kalogeropoulos (Alphabet): Google's owner Alphabet is set to open its fiscal 2019 with a first-quarter earnings report on April 29. The tech giant is coming off of a banner annual showing, with revenue up 23% in 2018. Sure, operating income held flat despite those gains, but that declining profitability was mainly due to discretionary spending by the management team in areas like YouTube, Google sales and marketing, and the headcount of engineers.
The real head-turning number in the 2018 results was $21.4 billion. That's the total the company laid out on research and development, and it puts Alphabet in a class of its own. Investors saw some major accomplishments in the Waymo project, including the launch of the Waymo One app, but there should be more notable milestones ahead in 2019 for the management team to highlight starting in late April. CFO Ruth Porat said back in early February that executives are in talks with other cities outside of the current limited self-driving test in Phoenix, and investors might get updates on those negotiations in just a few weeks.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos has no position in any of the stocks mentioned. Jamal Carnette, CFA, owns shares of Alphabet (C shares). Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Nvidia. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.