It’s clear that automotive is on the radar of tech companies as smartphone demand cools. In October, Qualcomm, Inc. (NASDAQ:QCOM) bought NXP Semiconductors NV (NASDAQ:NXPI), the world’s largest producer of chips for the automotive industry. In November, Samsung (OTCMKTS:SSNLF) purchased Harman International Industries Inc (NYSE:HAR), a leader in connected car technology. About then, Siemens AG (ADR) (OTCMKTS:SIEGY) purchased industrial design software firm Mentor Graphics Corp (NASDAQ:MENT) for $4.5 billion. Mentor produces software used to design electronics for industrial and automotive applications.
This continued in December. Blackberry Ltd (NASDAQ:BBRY), having recently quit the smartphone business, recently turned to autonomous cars. And Apple Inc. (NASDAQ:AAPL) released a letter detailing its interest in cars as well.
The consulting firm Roland Berger forecast that the market for assisted driving components will quintuple by 2025, and expects further M&A activity. Producers of high-tech components for connected and autonomous cars will be in the crosshairs of two major sectors: the auto industry and tech.
Bloomberg sees electronics companies such LG and Panasonic Corporation (ADR) (OTCMKTS:PCRFY) making similar moves to get into car tech. And Citi, in its Car of the Future v3.0 report, notes that automakers such as General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) are boosting their in-house tech via M&A. In March, GM bought Cruise, a maker of autonomous car technology. In August, Ford acquired SAIPS, an Israel firm focusing on machine learning and computer vision.
Investors can grab these auto stocks to prepare their portfolios for the future of cars.
Tech Stocks to Buy: Ambarella (AMBA)
Ambarella Inc (NASDAQ:AMBA) designs semiconductor processing solutions for automotive cameras. Autonomous and assisted vehicle features such as lane keep assist and collision avoidance depend on cameras, the eyes of the car.
With greater demand for automotive cameras on new cars, Ambarella’s business should thrive. AMBA stock’s designs integrate image processing, HD video and audio onto a single chip.
Ambarella stock trades at 43 times earnings and 19 times forward earnings, and 17 times free cash flow. AMBA stock also trades at 4.4 times book value. Granted, Ambarella stock may not be among the cheapest. But this $1.8 billion-plus company has grown sales and earnings at an impressive rate over the past five years. Analysts also project that Ambarella will grow earnings at a 16.3% CAGR over the next five years.
Ambarella also enjoys liquidity and zero debt.
Also, Ambarella’s 65.3% gross margin suggests a strong competitive advantage. Ambarella’s products are also used for wearable cameras, telepresence, security cameras and unmanned aerial vehicles (UAVs).
Tech Stocks to Buy: Mobileye (MBLY)
Mobileye NV (NYSE:MBLY) produces cutting-edge advanced driver assistance systems (ADAS) and autonomous driving technology. Mobileye’s EyeQ chips interpret visual data, including lanes, traffic signs and barriers, and process it, helping drivers avoid collisions.
Mobileye also produces mapping technology, competing with Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Baidu Inc (ADR) (NASDAQ:BIDU), Tesla Motors Inc (NASDAQ:TSLA) and Nvidia Corporation (NASDAQ:NVDA). Unlike Alphabet, Baidu and Nvidia, Mobileye is a pure play, focusing on car technology, without other businesses. Those who believe in the economic potential of next-generation cars can buy Mobileye stock to gain exposure to the field.
A stunning 90% of the world’s automakers use MBLY technology. Mobileye commands an impressive 75.5% gross margin and a 29.1% profit margin. Analysts expect MBLY to grow earnings at a 47.95% CAGR over the next five years.
Mobileye stock, down 18.4% from its 52-week high, still trades at 104 times earnings, 40 times forward earnings and 14 times book value. On the other hand, Mobileye has no debt, and the combination of high margins, market leadership and strong growth prospects should propel MBLY stock going forward.
Tech Stocks to Buy: TE Connectivity (TEL)
Smarter cars will create a great deal of data, which will need to be transmitted to the cloud and between cars and other machines. This shall create demand for TE Connectivity Ltd’s (NYSE:TEL) connectors, more of which will need to be deployed in car electronics.
TE leads in connectors, with a 15.8% global market share, ahead of rival Amphenol Corporation (NYSE:APH) with 10.1%. TE also produces automotive sensors that create the data.
Citi projects that connectors will grow from being a $12.5 billion business in 2016 to a $16.5 billion one in 2021. TEL stock trades at 12 times earnings, 14 times forward earnings and 3 times book value. TE Connectivity stock also carries a 2.2% dividend yield and commands a 16.4% profit margin. TEL trades not far from its 52-week high.
TE Connectivity is not limited to automotive: its sensors and connectors are also used in smart homes, the energy sector, medical and many other sectors. TEL’s $24 billion market capitalization, however, makes it an unlikely takeover target.
Tech Stocks to Buy: Autoliv (ALV)
Autoliv Inc. (NYSE:ALV) produces a variety of passive and active safety systems, including radar, vision, night vision, brakes, seatbelts and airbags. Autoliv’s dynamic spotlight detects pedestrians from a distance and illuminates them, helping the driver avoid them at night.
Autoliv’s 6.1% profit margin might not look too impressive at first, but consider the industry. A McKinsey &. Company report, The Future of the North American Automotive Supplier Industry, found that ALV earned a higher margin than its peers in both 1996-2002 and 2003-2009. Autoliv stock trades at 17.6 times earnings and 15.7 times forward earnings, and 2.7 times book value.
Autoliv stock is 10.8% off its 52-week high. Autoliv boasts a 2.1% dividend.
Tech Stocks to Buy: Delphi Automotive (DLPH)
Delphi Automotive PLC’s (NYSE:DLPH) businesses span the future of cars: infotainment, ADAS/autonomous driving, electrical/electronic content, sensors, connectors, driver interface and electric vehicle products such as battery chargers. Buying Delphi stock offers a way to play the future automotive trend with a single stock.
However, Delphi, like TE Connectivity, is a fairly large firm and unlikely to be acquired by another company.
Delphi is becoming more technology intensive, inking deals with Silicon Valley firms. Last year, Delphi invested in Tula, which produces software algorithms that save fuel by making cylinder deactivation more efficient. DLPH also invested in Quanergy, a startup making LiDAR systems. According to Delphi CEO Kevin Clark, Delphi sells products using 20 billion lines of code a day, and this will increase to 200 billion by 2020.
Delphi stock trades at 16.4 times earnings, 10.7 times forward earnings and 7.4 times book value. Delphi stock trades at 13.7% below its 52-week high.
Tech Stocks to Buy: Lear Corporation (LEA)
Lear Corporation (NYSE:LEA) supplies automakers with seating, electrical distribution systems, electronic modules, sub-systems and software. Some examples of these include wireless systems for keyless entry as well as gateway modules for data transfer. It competes with three of the companies mentioned, including Delphi, TE and Magna International Inc. (USA) (NYSE:MGA).
Lear enjoys high barriers to entry in seating, as McKinsey notes. Automotive seating is heavily regulated for safety purposes, and producers require a great deal of technical expertise involving crash-test regulations, making entry difficult.
Lear Corporation is 1.9% below its 52-week high, and still trades at low multiples. This comes at a time when the market trades at high historic multiples, making it difficult to find quality value stocks. Lear stock trades at 10.9 times earnings, 9.3 times forward earnings and 3.2 times book value. Also, Lear stock trades at a multiple of 0.51 times sales and 8.39 times free cash flow.
Lear is projected to grow earnings at a 13.2% CAGR over the next five years. This insulates Lear from charges of being a value trap, and gives Lear a 0.75 price/earnings to growth multiple.
Tech Stocks to Buy: Magna International (MGA)
Magna produces a variety of vehicle components. These include powertrain systems, vehicle exteriors, seating, vision systems, roof systems and electronics.
Like Lear, Magna’s low valuations should interest those searching for value in a crowded market. Magna trades at 8.9 times earnings, 7.7 times forward earnings, 0.5 times sales, and 1.8 times book value. MGA is trading 4.3% off its 52-week high.
Magna stock holds a 2.2% dividend yield, with only an 18.9% payout ratio. Magna could easily triple the dividend, which would boost MGA stock. And Magna has shown strong dividend growth over the past few years, making further increases likely.
Tech Stocks to Buy: Methode Electronics (MEI)
Methode Electronics Inc. (NYSE:MEI) produces automotive electronics, user interfaces, sensors and switches, and power distribution products. The driver interacts with the car through the user interface, making this a critical component of a smart car. Methode produces touchscreens, biometrics and haptic controls (which allow drivers to feel the interface and not take their eyes off the road).
Methode is 74.8% above its 52-week low. Although Methode may not be valued as cheaply as Lear and Magna, MEI still offers some upside. Methode stock trades at a multiple of 19.2 times earnings, 15.8 times forward earnings and 3.2 times book value.
Aside from valuation, Methode shows strong financials. It boasts a strong balance sheet with very low debt and is unlikely to face liquidity problems with a quick ratio of 3.8. Methode also earns a 10.8% net margin.
Tech Stocks to Buy: Synaptics (SYNA)
Synaptics, Incorporated (NASDAQ:SYNA) produces human interface solutions, including touchpads and fingerprint IDs.
This firm presents an opportunity for those who will pass on buying Methode and want a stock that has been beaten up by the market lately. Synaptics is down 31% year-to-date and trades at 16.5% above its 52-week low. Methode, on the other hand, has soared from the low $30s in November to $42 a share now.
Synaptics stock may trade at 39.2 times earnings, more expensive than MEI in that regard, but it trades at a discount to MEI on other measures. Synaptics trades at 10.6 times forward earnings (as opposed to 15.8 for MEI) and 8.85 times free cash flow. This is less than half of Methode’s multiple of 17.8 times free cash flow.
Synaptics also trades at a lower multiple of book value than Methode.
Tech Stocks to Buy: Nuance Communications (NUAN)
Nuance Communications Inc. (NASDAQ:NUAN) produces voice recognition and natural language processing technology. Nuance’s DragonDrive allows drivers to speak to the vehicle interface and interact with it, and allows the driver to access cloud-based services and infotainment. It also recognizes the driver’s voice.
Aside from automotive, NUAN is also involved in healthcare, mobile devices, and enterprise — selling transcription and dictation software for electronic medical records — and Optical Character Recognition technology.
Nuance stock is down 22.3% in the last year. Nuance stock changes hands at 9.1 times forward earnings, 8.5 times free cash flow and 2.3 times book value.
As of this writing, Lucas Hahn did not hold a position in any of the aforementioned securities.