With all the buzz around electric and autonomous vehicles (EVs and AVs), investors sometimes forget that the manufacturers of these cars of tomorrow are not lone soldiers in the field. Their advancement wouldn’t be possible without a myriad of firms developing software and hardware technologies that support security, connectivity, data management, and other solutions, turning our cars into sophisticated computers on wheels. However, in this competitive and capital-intensive field, most of the pure plays are still unprofitable, and while some of them may present a lucrative growth investment opportunity, it takes hard work to find a diamond in the rough.
The Curious Case of Mr. Car
The Auto Tech industry, aka Car Tech, aka Mobility Tech, is comprised of companies that provide technology-based solutions to car manufacturers and vehicle infrastructure. The industry’s roots reach back to the 1920s, when the first radio was installed in a Chevrolet car. Cut to today, we drive a complicated computer system on four wheels, without even realizing the amount of cutting-edge software and hardware hiding below the plastic and metal.
The transition to electric is only one part of the secular megatrend gaining pace in the past two decades. This secular trend is called “CASE”: Connected, Autonomous, Shared, and Electric.
“Connected” means that a vehicle can communicate with people and systems, enabling better route planning, enhancing safety, and improving maintenance. The recent advancements in big data and artificial intelligence (AI) are taking connectivity to the next level, accelerating progress toward full autonomy. Hence, “Autonomous” means that the vehicle, supported by advanced tech, can operate with minimal or no human intervention. “Shared” is often an overlooked part of the CASE trend, but it is expected to gain more traction in the not-so-distant future. Shared mobility refers to the collective, or shared, usage of vehicles, and it helps both budget-aware commuters and the environment. With the rapidly rising penetration of mobile connectivity globally, this trend is beginning to catch on in many large cities around the world.
Technologies of Tomorrow, Today
Auto Tech is divided into two fields: automated driving and in-vehicle data and software. Automated driving technologies include battery electric vehicle (BEV) technologies and charging infrastructure, fuel cell vehicle (FCEV) technologies and charging infrastructure, and autonomous driving systems. In-vehicle data and software include the following segments, many of which utilize AI development: sensing / LiDAR (light detection and ranging)software, connected car platforms, utilization of vehicle data, in-vehicle infotainment, and cyber security for vehicles. This partition is largely arbitrary, as technologies belonging to each field often intertwine, combining to make CASE possible.
Thus, the connectivity of a vehicle is based on a technological ecosystem that enables the transfer and retrieval of large data volumes; it combines connection to the environment, telematics (connection to the cloud), and infotainment, i.e., connection to the driver/passenger. All these connections turn a car into a node on the Internet of Things (IoT), supporting intensified safety and security, enhanced navigation, maximal personalization, optimal functionality, and predictive maintenance. According to a McKinsey report, almost all vehicles sold in 2030 will be connected.
Accelerating connectivity provides a solid foundation for autonomy, as autonomous vehicles demand fast and reliable connections to acquire and process data received from a variety of sensors to support real-time computerized decision-making. While full automation hasn’t been achieved yet on a level that provides sufficient safety and functionality, the fast strides in the development of supporting technologies permit an optimistic projection of reaching this goal within a decade or less.
Connectivity also supports the rising trend of shared mobility of all sorts, from ride-hailing (think of Uber and Lyft) to micro-mobility (e-rent of bicycles and scooters) to car-sharing and car-pooling. McKinsey sees a large potential for shared mobility in global urban areas, adding to the list of the most disruptive trends in this space the shared autonomous shuttles of the future.
The transition to electric vehicles is currently the most advanced theme of the CASE megatrend, spurred on by both consumer demand and government support measures. Despite numerous bottlenecks, mostly connected to EV infrastructure development, battery-powered cars are forecasted to rise to 40% of total global sales in 2030. Connectivity is a pre-requisite for electrification since EVs depend on connected software to function, update, and charge.
Is Amazon an Auto Tech Stock?
The EV and autonomous vehicle development and production is dominated by EV-makers like Tesla (TSLA), BYD (BYDDY), Lucid (LCID), and Rivian (RIVN), as well as legacy carmakers like Volkswagen (DE:VOW), General Motors (GM), Honda (HMC), and others, who are increasingly moving into this lucrative space.
On the other hand, the wide segment of enabling technologies like sensor technologies, autonomy-supporting tech, data capture and analytics platforms, and vehicle security technologies, is teeming with numerous startups, many of which are supported by large automakers. These aspiring auto-tech leaders are trying to shoulder some space from tech giants such as Alphabet (GOOGL), Amazon (AMZN), Nvidia (NVDA), and Apple (AAPL), who dominate the infotainment space and hold a notable presence in connectivity and driver-assistance technologies, building on their existing capabilities and unlimited budgets. However, there are also numerous public companies of all sizes (albeit mostly small) competing in different niches of the Auto Tech industry.
Magna International (MGA), a Canadian auto parts manufacturer, is one of the largest mobility technology companies trading in the U.S. markets. However, it can’t be called a pure-play auto tech firm, as it mainly produces automotive systems, assemblies, modules, and components, which are supplied to all EV and legacy automakers. Under its mobility tech umbrella, it offers ADAS sensors and control module technologies for EVs.
Another large player in the market is Aptiv Plc. (APTV), an Irish company trading on NYSE, which develops connectivity and monitoring solutions to improve safety and convenience, as well as high-speed data and high-power electrical systems enabling highly automated vehicles.
Wide Range of Offers, But Not Much to Choose From Yet
One of the most interesting and fast-developing niches of auto tech is LiDAR and other sensors, as they are a key component in autonomous vehicles, providing a high-resolution 3D view of their surroundings. LiDARs enable autonomous vehicles to “see” by generating and measuring millions of data points in real time, creating a precise map of their ever-changing surroundings for safe navigation. According to research, the global automotive LiDAR market is expected to reach $6 billion by 2029 (from $792 million in 2022), underscoring the attractiveness of the field.
However, the LiDAR market is an overcrowded field with stiff competition; it is also a very capital-intensive niche. Most of the companies working in this space are small and still unprofitable. Although some of them may hold vast potential, it may take years until some of these players realize that potential; on the other hand, a cash-burning startup can fail at any given moment. In addition, the auto and tech behemoths are also contesting for market share, including automotive giant Continental AG (DE:CONA) and Alphabet’s subsidiary, Waymo.
One of the most valuable lidar franchises is Luminar Technologies (LAZR), whose bombastic IPO in 2021 was expected to help push its laser sensors into the production lines of major automakers. Since the cheap money-fueled tech frenzy has ended, the firm’s stock has lost over 90% of its value, and now analysts’ outlook is getting grimmer by the day, with loss projections upped for 2024.
Another aspiring LiDAR leader is Innoviz Technologies (INVZ), who SPAC’d with a bang in 2021 and lost almost 90% of its stock price since. The company offers solid-state LiDAR sensors and develops perception software that enables the mass production of autonomous vehicles. Although the company’s prospects look promising after it secured cooperation with most top global automakers, positive net profits are still at least three years away.
Will Cruise Control Help Drive Profits?
Another lucrative, but equally difficult to tame, theme within the auto tech field is the autonomous vehicle solutions centered around safety. While fully self-driving cars may be a decade or more away, most new vehicles already contain features permitting some level of autonomy. These features, which increase safety while still keeping drivers behind the wheel, are included in what is commonly called advanced driver assistance systems (ADAS). These are collision avoidance technologies, such as automatic emergency braking, pedestrian detection, surround view, and more, as well as driver aids like night vision, driver alertness monitoring, adaptive cruise control, parking assistance, etc.
One of the undisputed leaders in this subindustry is Mobileye Global, Inc. (MBLY), a pioneer in ADAS technologies, producing the world’s first full System-on-Chip ADAS solution, mounted on the windshield, back in 2004. Mobileye, founded in 1999, now holds around 70% of the global market share in ADAS systems – but, despite that, it still turns in negative operating income. While MBLY is financially healthy and is expected to become profitable in the next year or two, the main factor behind its business success is the support from Intel (INTC), its majority shareholder. However, the ADAS market is already relatively large, and expected to expand at breakneck speed as the advancement of autonomous mobility solutions, namely integration of various driver-supporting features, drives significant market growth, despite current macroeconomic headwinds. The global ADAS market was valued at $25 billion in 2022; it is estimated to achieve a market size of about $90 billion by 2030. If Mobileye merely keeps pace with that growing market, its annual revenue will surge, leading to higher profitability than currently expected.
Source: Google Finance
Research is the Highway to Capital Gains
So, we’ve established that the auto tech business offers a vast potential for companies working in the field, as well as their shareholders. However, investors who wish to capitalize on this growth trend face a market characterized by very high volatility in individual stocks, as well as vast differences in the financial metrics and profitability forecasts of companies acting in this sphere.
These dissimilarities in companies’ fundamentals and prospects for earnings growth underscore the importance of research for aspiring auto tech investors. As not every company in this market is able to capitalize on the opportunities presented by the market potential, it is essential to dig into the data, analyzing companies’ finances, industry competitiveness, growth prospects and risks, and more.
Alternatively, investors can leverage the existing analysis, utilizing research done by Wall Street’s leading analysts. TipRanks has several tools, such as a stock screener, stock comparison tool, technical analysis screener, and others, that can help investors employ the vast amounts of data and research stored in its database, to their benefit.
As another option, investors can buy into one of the smart mobility ETFs, utilizing one of the many TipRanks ETF tools to pick the winning fund:
To conclude, auto technology stocks provide investors with an opportunity to profit from an accelerating secular CASE megatrend. However, it is important to take into account the companies’ finances and prospects to pick the winners who can create long-term value for their shareholders.