4 Stocks for the New Age of Electric and Connected Cars
Future cars will be mostly electric, automatically avoid accidents and affordable.
You may already know some of the big electric vehicle manufactures like Tesla, Inc. (Nasdaq: TSLA) and NIO Ltd. (NYSE: NIO) … but you may not know about the companies that develop their vital components.
And if you don’t, now’s the time to learn because some of these picks look like incredible opportunities.
Savvy investors will find ways to get ahead of the new technology.
In Chengdu, China on Jan. 9, NIO will introduce an electric vehicle with autonomous driving software and sensors. It’s going to be quite the spectacle.
Some investors will buy NIO the carmaker.
But the even better plays are Aptiv PLC (NYSE: APTV), NXP Semiconductors N.V. (Nasdaq: NXPI) and Lumentum Holdings Inc. (Nasdaq: LITE). These companies are the ones that make the essential components that allow NIO to create EVs in the first place.
That’s not saying NIO isn’t a great stock. Interest in EVs skyrocketed in 2020 as Tesla shares soared fivefold. Investors looking for alternatives soon discovered Chinese EV makers with shares available as American depository receipts.
But ADRs carry their own risks. Often, the underlying businesses are not subject to the same accounting rules as American firms, leaving the inner workings of the business opaque.
Despite this, during 2020, NIO shares surged a whopping 1,112%. Much of the excitement was related to ET7, the vehicle NIO will reveal on Saturday.
In addition to a larger swappable battery pack, the ET7 is expected to have always-on 5G, vehicle-to-everything connectivity, next-generation LiDAR and computer vision software that will eventually lead to full autonomy within a year.
Related Post: BMW Lays Plans to Electrify Your Commute
It’s a tall order, but one day soon, most new vehicles will have these features. Analysts are starting to call this the “Internet of Cars”.
Integrated 5G, plus V2X connectivity, will permit over-the-air software updates. Bringing vehicles inside of larger networks heralds the beginning of new digital possibilities, like contactless payments and interaction with smart city infrastructure. Whizzing through toll roads will become a thing.
To get to that place, car companies are investing furiously in redesign vehicles.
Which brings us back to Aptiv, NXP Semiconductors and Lumentum. The big opportunity for investors is the software, semiconductor and sensor businesses that make the essential bits and pieces to move from the status quo.
Only a handful of suppliers have the working relationships, scale and technology to meet these needs.
Aptiv PLC might be unfamiliar. In 2017, the Irish firm was spun out from Delphi Automotive, one of the first auto-part suppliers. The company designs Advanced Driver Assistance Systems, the software that takes over braking and steering when a vehicle’s onboard computer senses peril.
Aptiv also makes next-generation power and signal solutions. That’s a fancy name the software architecture car companies — including Tesla — use for electric routing.
Vehicle makers will launch 45 new high-voltage platforms by 2022, according to a June Aptiv investor presentation. Bookings for these systems are expected to climb to $1 billion annually by 2022, a staggering 40% compound growth rate from current levels.
Managers at NXP Semiconductor are also seeing orders from automotive companies ramp up, according to an October press release. The Dutch company makes the mixed-signal processors used to run computer networks in newer vehicles. This silicon is essential for 5G and the sophisticated V2X systems that run payment, infotainment, mapping and security.
NXP also controls all the intellectual property for contactless payments on credit cards and smartphones.
Lumentum operates on the other end of the spectrum. The company announced in October its researchers made an important breakthrough with VCSEL chip arrays, a source of light for LiDAR sensors.
LiDAR is a type of light detection and ranging radar. The sensor sends out a laser light to the target and the distance away is measured almost instantly by the reflection back to the sensor. LiDAR will build extremely accurate 3D maps in real-time.
Related Post: Why the New Tesla Dream Is Battery Powered
The new Lumentum chips send more powerful light arrays while being more energy efficient and cheaper to produce. This will reduce the size and cost of LiDAR, often the bulkiest and most expensive sensors in an autonomous vehicle setup.
Each of Aptiv, NXP and Lumentum quietly moved to new highs on Tuesday. With price-to-forward earnings ratios of 33 times, 20 times and 14 times, respectively, these shares are still inexpensive and undiscovered by mainstream investors.
That will likely begin to end following the NIO ET7 reveal later this week.
Investors should buy NIO, Aptiv, NXP and Lumentum shares into any near-term weakness.
Jon D. Markman