Self-Driving Technology: 8 Tech Companies For Investment – Seeking Alpha

Introduction

Nowadays, almost every automaker possesses considerable resources to develop self-driving technology for cars, which is the next big step for the automotive industry. The market for autopilot technology is clearly huge, which is evident by an estimation, that approximately 100 million "connected" cars with the capacity of self-driving will be shipped in 2021.

While most auto manufacturers try to invent their own solutions, they will be forced to collaborate with technology companies in fields of both software and hardware to bring self-driving cars to roads. Therefore, in this article, I provide a list of the most promising publicly traded tech corporations, which should be considered by investors who would like to try to profit from the development of autonomous driving.

Technology overview

First of all, let us very briefly look at the technology. The final solutions of each automaker will be different, but still they will share some common characteristics.

In general, autopilot uses three types of sensors: cameras, ultrasonics/radars and lidars. Each sensor performs its own function and has different abilities. Radars are able to detect moving objects in the surroundings of a vehicle but are unable to detect lines or traffic lights, and they are not very precise at human detection.

Lidars have similar features, but can more easily detect humans but are also more expensive than radars. The primary sensors are cameras, which can detect all objects, including lines, traffic lights and pedestrians. However, cameras fully rely on software to process all the input, therefore, using only cameras is difficult for a self-driving car system.

Then, all the input from the sensors needs to be processed and analyzed, which is made possible by the use of Deep Neural Networks (DNN). DNN is a code, which lies in the basis of every autopilot and it helps recognize objects, distinguish them, and make decisions on what to do. For instance, DNNs are needed to recognize borders on the road, the colors of a traffic light, or discern a sedan from a truck. In the end, the software system inside the car's computer processes all the information and operates the steering wheel and pedals, thus safely driving a car to a destination.

To illustrate how exactly neural network recognizes objects and makes decisions, Tesla (NASDAQ:TSLA) provided a video of autopilot in motion, which can be seen here.

Companies:

Nvidia (NVDA)

Nvidia is considered to be the pioneer of hardware related to autopilot technology. The company has already proven its superiority in terms of automotive infotainment systems (i.e. cars on-board computer systems) with its Visual Computing Module, which uses Tegra chips to provide graphics to a vehicle's interior screens.

Nvidia currently counts such automakers as Audi (OTCPK:AUDVF), Porsche (OTCPK:POAHY), BMW (OTCPK:BMWYY), Tesla, Honda (NYSE:HMC) and Mini as its customers for digital cockpits claiming "more than 10 million cars on the road today" are powered by Nvidia. Through the first 3 quarters of 2016, the corporation derived 7.6% of its revenue from the automotive industry, and I believe that corporation is going to maintain these relationships to develop autopilot technology.

The latest autopilot hardware introduced by Nvidia is its Nvidia Drive PX 2 - a car computer that uses artificial intelligence to support autonomous driving. The system is able to derive and use data from all kinds of sensors like cameras, lidars, radars, and ultrasonic sensors, locating a vehicle in space and on a map, planning a safe path and being aware of all objects around a car.

Nvidia describes the product as follows:

DRIVE PX 2 can understand in real-time what's happening around the vehicle, precisely locate itself on an HD map, and plan a safe path forward. It's the world's most advanced self-driving car platform-combining deep learning, sensor fusion, and surround vision to change the driving experience.

Moreover, the corporation's autopilot technology is powered by another of Nvidia's invention - the Nvidia DGX-1 supercomputer, which enables fast machine learning on the basis of deep neural networks. This means that a car supported by DRIVE PX autopilot is able to continuously develop its ability to detect possible collisions and understand types of objects in its range of vision, thus making autonomous driving even more safe and precise.

Nvidia already provides the autopilot technology hardware for all new Tesla cars, running a Tesla-made software - neural network for vision. I expect that in the near future most carmakers that are interested in autonomous driving will implement the computer made by Nvidia, since it is currently the most powerful and well-developed solution. Therefore, Nvidia corporation will inevitably benefit from future collaborations, and the company's growth will be positively impacted by Nvidia's exposure to the increasing autopilot market.

While Nvidia should definitely be included in a portfolio of autopilot technology companies, I consider the current price level of Nvidia stock to be too high to buy. Its P/E ratio is an astronomical 55.0 and the price increased by more than 400% over the last year. Additionally, preliminary data shows 2.7 times growth of net income from 2016 to 2017 and it will be hard for the corporation to maintain this pace of growth over the long term.

The notable support levels of Nvidia stock are around $100 and $90, and the range between them, representing around a 40 P/E ratio, seems to be reasonable to consider a buying opportunity. However, taking into consideration the market rally we currently see, it is possible the price may not drop to these levels.

Delphi Automotive (DLPH) and Mobileye (MBLY)

Another notable company is Delphi Automotive PLC based in the United Kingdom. The corporation provides vehicle components and is especially interesting due to its safety technology solutions and electrical architectures. Autopilot technology is to some extent based on these very same safety systems, and therefore it is possible for Delphi to develop autonomous driving solutions based on its own existing products, which the company is already doing.

It is also interesting to note that Delphi received 22% of its net sales from the two huge automakers (9 months ended September, 2016) - General Motors (NYSE:GM) and Volkswagen (OTCPK:VLKAY), which are also working on providing autonomous cars in the nearest future. This shows that the existing ties with the automotive industry can enable Delphi to bring to life its autopilot solutions and quickly commercialize products for autonomous driving.

There are many examples of Delphi's efforts in the autopilot market. In 2015, Delphi in collaboration with Audi demonstrated its autonomous vehicle technology with a cross-country trip in the USA. The self-driving Audi car installed with Delphi's solution drove "99% of the time" controlled only by a computer without any human interaction. Moreover, in 2016, Delphi was selected by Singaporean authorities to implement an autonomous mobility concept in the state. The company is expected to provide a fleet of autonomous vehicles and develop cloud-based mobility software.

One of the most important alliances for Delphi in terms of autonomous driving is with another vehicle products supplier - Mobileye, from Israel. In 2016, the two companies revealed their partnership, which was formed in order to provide fully automated cars by 2019, while other automakers were expected to achieve this only by 2020-2021.

In turn, Mobileye, the supplier of vehicle localization and mapping software and machine learning solutions, is another corporation, which should be considered by investors who are willing to gain from autopilot development. Although the corporation lost its one important client, Tesla Inc., in late 2016, Mobileye claims that "13 automakers are working with Mobileye to enable autonomous driving." Moreover, about 27 corporations from the automotive industry use the corporation's solutions in terms of safety on roads.

Both Delphi and Mobileye should be included in a portfolio of autopilot technology companies. I find the financial situation of both companies to be in good shape. For instance, from 2011 to 2015, Mobileye's revenue grew by 80% on average, and I expect that the growth will continue in the near future.

This is primarily because Mobileye's average price for autopilot products (which will consist of cameras, driving policy algorithms and mapping) is expected to be in the range of $400-500, which is "10 times above $45 ASP Mobileye currently records for individual ADAS (safety) solutions." The price of Mobileye's stock rose by around 20% in 2017 and any pullback can be considered as a buying opportunity.

Regarding Delphi Automotive, the company's stock is trading with an 18.0 P/E ratio, which is considerably lower than the industry average. Additionally, despite ongoing restructuring, Delphi managed to have stable net income in 2016 and declared an increase in cash from operations exceeding the Street's 4Q forecast. The stock price of Delphi already increased by 13% in 2017 and now is near a 2-year high showing good performance. I believe the current price level ($75-76 as of February, 15) can be considered by investors as a buying point.

NXP Semiconductors (NXPI), Qualcomm (QCOM) and Cisco (CSCO)

NXP Semiconductors N.V. is a semiconductor company, which has a good portfolio of products including car audio and car vision products for safety. NXP already has 14.4% of the automotive semiconductor market, and the company's chips are already implemented by many carmakers including Tesla, Daimler (OTCPK:DDAIF), BMW and Audi.

I consider the company as a potentially big player in the autopilot market. This is not only because autonomous driving solutions will require some existing products from NXP (like safety car systems, microcontrollers and sensors), but also because the corporation has a high potential for developing new solutions based on existing technologies. For instance, NXP already provides transaction security systems and in-vehicle networking products, which can easily be transformed into new solutions to enhance vehicle networking security and establish connections between cars on roads making a cloud-based communication system.

Thus, NXP with Cisco made the first step to achieve inter-vehicle networking by making an investment in Australian company Cohda Wireless. The company specializes in radio systems and software that will allow vehicles to establish communication networks between them. This will enable vehicles to share information such as current speed, heading, and "whether they are braking or accelerating."

Qualcomm seems to be interesting due to its expertise in data communication, but the main value of the corporation is its Qualcomm Strategic Initiatives segment (QSI) which invests in early-stage companies in various industries, among which are different communication systems. Moreover, the corporation made an offer to buy the aforementioned NXP Semiconductors, in which case, Qualcomm will have direct exposure to the automotive market.

Regarding buying points of NXP, the corporation's stock is consolidating in the range that is 10% lower than the price offered by Qualcomm ($100 against $110). This is because the company has high short-term expenses, and due to that fact, NXP is likely to show negative income in the near future. However, if the corporation will eventually be bought by Qualcomm or will receive a counteroffer, the gain for the investor is inevitable.

Both Qualcomm and Cisco are trading with P/E ratios, which are significantly lower than the industry average (17.2 and 15.7 against 27.7 and 22.5 respectively). At the same time, the corporations show solid operating margins and very strong returns on equity (ROE) that are higher than the industry average. Cisco's stock price has already risen by 10% in 2017 showing a very strong pace and I believe current price levels (around $32) are good moments to buy the stock. Qualcomm shares have dropped by 13.36% in 2017 but have now consolidated near $55 level, which is a good opportunity to invest in the company.

Intel (INTC) and Microsoft (MSFT)

Both tech giants show their mobility in terms of thinking, since they are involved in developing many future technologies. For instance, I already wrote how these blue-chip corporations work on the blockchain, and now I expect they will work closely with automakers to bring autonomous cars to life. Thus, Intel has already revealed at CES 2017 its collaboration with BMW claiming they will start testing autonomous technology on the roads by the second half of 2017.

In turn, Microsoft took another approach saying it will try to integrate its existing products, like Azure cloud, Windows, and Office 365 into vehicles of established auto manufacturers. Therefore, I believe both Intel and Microsoft should be included in a self-driving technology portfolio.

Regarding moments for making investments in Microsoft and Intel, I restate my valuations made in the previous article and consider current price levels for both stocks ($64 and $36 respectively) as good moments for buying. These points represent around a 30 P/E multiple for Microsoft and a 17 P/E multiple for Intel.

Conclusion

Overall, the technology of self-driving requires many separate products to be combined to achieve a comprehensive solution. Clearly, many tech companies will try to become involved in autonomous driving development and gain from this market opportunity. However, I believe that the 8 corporations described in this article are the most promising options for investors who want to profit from the autopilot expansion.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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Self-Driving Technology: 8 Tech Companies For Investment - Seeking Alpha