In more car showrooms, consumers are hearing a high-tech sales pitch. And, it’s not just about having a DVD player for kids.
The next car that consumers buy will have more electronics packed into it than ever and many semiconductor companies – with Nvidia (NVDA), Texas Instruments (TXN), Maxim Integrated Products (MXIM), On Semiconductor (ON), Microchip Technology (MCHP) and Qualcomm (QCOM) among them – aim to take advantage.
Consumers nowadays figure on crash air bags, anti-lock brakes, and perhaps even onboard navigation systems as standard features. More vehicles are being equipped with ADAS (automated driver assistance systems) that improve safety, as well as having infotainment and internet-connected technology.
That rising market is part of what has continued to drive chip stocks higher this year as many leading industries have paused their year-end rallies, or pulled back while the political environment establishes some clearer momentum.
Stocks like Nvidia, Maxim and On Semi are pecking away at new highs. Microchip spiked more than 6% to a new high on Wednesday, following a healthy Q3 report.
IBD’S TAKE: The chipmakers and fabless chip industry groups on Thursday ranked high, at Nos. 30 and 31, among the 197 industries tracked by IBD. Industry group rankings are an excellent way to follow institutional investing trends, the I in the CAN SLIM investment methodology.
Automotive is a relatively small piece, about 10%, of the global semiconductor market. But Gartner Group forecasts that automotive semiconductor revenue will grow through 2020 at twice the rate of the overall chip market.
Driver Assist A Driving Force
Some chipmakers are using acquisitions to gain traction in automotive, which “is a horrible market to break into,” said Malcolm Penn, CEO of consultancy Future Horizons.
“The automotive market is probably the hottest market right now,” said Penn. “More electronics is going into cars, for safety and other reasons. Automakers want cars to be better performers and that takes electronics. But, it takes a long time to break into the market and market share doesn’t change quickly. Pricing is demanding. Automakers want the highest performance at the lowest possible cost.”
ADAS provides lane-keeping assist, automatic braking, adaptive cruise control, blind-spot alerts, and other features. ADAS requires more sensors and data-crunching processing power, says Chris Webber, analyst at Strategy Analytics.
“ADAS is the real growth driver in automotive right now,” said Webber, adding that self-driving cars will be a more formidable goal. “It will be a long and evolutionary road to truly autonomous vehicles on the main highways and city streets.”
As it stands, luxury cars have about $1,000 worth of built-in silicon, midrange cars about $350 to $400 and low-end models about $100, says John Pitzer, analyst at Credit Suisse. As ADAS and other features become options and then standard, low- and midrange cars will close the silicon gap. Luxury cars, meanwhile, will evolve to feature even more advanced safety bells-and-whistles.
“Electronics are becoming an important differentiator at the point-of-sale (in showrooms),” Pitzer said in a report.
Gartner projects that the automotive chip market will grow 6.2% in 2017, to $34.3 billion, and 7.2% in 2018, to $36.8 billion – though it also recently increased its forecast for the overall semiconductor chip market owing to higher memory chip prices for suppliers like Micron Technology (MU).
Many chipmakers are banking on future growth from automotive. NXP Semiconductors (NXPI) grabbed a large piece of auto market share with its $11.8 billion acquisition of Freescale Semiconductor in 2015. Qualcomm piggybacked on the strategy, announcing in October that it would acquire NXP for $47 billion.
Following the Freescale deal, NXP garners over 40% of revenue from sales to the automotive industry. Some 34% of revenue at ON Semiconductor comes from automotive, 25% at Microchip, 19% at Maxim Integrated and 15% at Texas Instruments, says a Citigroup report.
The growth rates of those revenues are well above industry average in many cases. Nvidia’s automotive revenue rose 52% in fiscal 2017, according to results reported after Thursday’s close. Texas Instruments’ auto sales jumped 23% to $4 billion in 2016. Maxim’s automotive revenue will rise nearly 20% in fiscal 2017 to over $450 million, estimates RBC Capital.
Citigroup has estimated that Nvidia’s auto revenue will hit $1 billion in 2018, owing largely to a partnership with Germany’s Audi.
From its roots in producing chips for car infotainment systems, Nvidia expanded into ADAS safety technology. It’s now pushing into more complex, self-driving cars.
Nvidia’s powerful processors are well-suited for the AI — artificial intelligence — software that enables ADAS systems. Self-driving cars map and monitor their surroundings to detect hazards. At the Consumer Electronics Show in early January, Nvidia and Germany’s Bosch said they would team up to develop cars that can sense when drivers are falling asleep or texting on phones.
“It’s going to take an enormous amount of engineering to transform the entire automotive industry into an autonomous industry,” Nvidia CEO Jen-Hsun Huang said in a CES keynote address.
Gartner forecasts that 18% of automobiles produced in 2020 will be equipped with ADAS, up from 7% in 2015.
JPMorgan forecasts that the autonomous driving market will boom to $7.3 billion by 2025. Harlan Sur, a JPMorgan analyst, estimates that during that period ADAS-related chip content will increase by $300 to $400 per vehicle.
ADAS requires sensors and “analog” chips to monitor real-world driving conditions, digital processing for mapping, and microprocessors to take over driving functions when needed, Sur says.
“We believe winners in our semi universe for autonomous driving will include Mobileye (MBLY), NXP, Nvidia, Intel (INTC), ON Semiconductor, Xilinx (XLNX), Cypress Semiconductor (CY), Texas Instruments, Microchip, and Maxim,” said Sur in a report.
Xilinx’s programmable chips are used for prototyping next-generations ADAS platforms, for example.
The Joy Of Lengthy Design Cycles
For semiconductor firms, the automotive market is much different from wireless or consumer electronics. For starters, there’s volume to consider.
Smartphones are a huge-volume market, with roughly 1.5 billion units sold worldwide last year. Global auto sales meanwhile inched up last year to around 88-89 million units.
Chip content within the auto industry is growing at a faster rate than actual auto sales and is just in the early innings, says Oppenheimer analyst Rick Schafer.
“Semi content growth is outpacing unit growth, a trend we see as sustainable as vehicles transition from mechanical to increasing electronic,” Schafer wrote in a report.
Many chipmakers live or die based on whether their devices are built into the latest Apple (AAPL) iPhone, with new versions rolled out annually. Such “socket” wins are harder to come by as Apple and its rival Samsung design more of their own chips in-house.
In automotive, though, design cycles take years. Chips, modules and subsystems are designed to handle harsh conditions with 100% reliability. The payoff? Popular models also stay in production for years.
“The growth and stability of the automotive market has not been lost on semiconductor vendors, like Nvidia and Qualcomm,” said Webber at Strategy Analytics.
Qualcomm’s purchase of NXP, the industry’s biggest acquisition in 2016, is expected to close in Q1. After the Freescale merger, NXP is the biggest seller of automotive chips, followed by Germany’s Infineon Technologies (IFNNY), Japan’s Renesas, STM and Texas Instruments.
Acquiring NXP diversifies Qualcomm’s customer base as wireless competition intensifies and it’s mired in a legal spat with Apple over licensing fees.
“There’s no doubt acquisitions and consolidation will continue as well as entry opportunities for niche technology vendors,” added Webber.
Beyond ADAS: Infotainment, Powertrains
Automotive market share has also been a leading motive in other deals. Analog Devices (ADI) in July gobbled up Linear Technology for $14.8 billion. Almost one-fourth of Linear’s revenue comes from automotive customers. In September, Renesas agreed to pay $3.2 billion for Intersil (ISIL).
Texas Instruments, with its focus on industrial and automotive, is a possible consolidator, says Oppenheimer analyst Rick Schafer.
Dave Pahl, Texas Instruments VP of investor relations, on its Q4 earnings call said the company expects that “industrial and automotive will be the fastest-growing semiconductor markets due to their increasing semiconductor content.”
“These are long-tail type of design wins and revenue streams,” he said, indicating that products tend to have a long life, in environments with slow redesign cycles. “And … we’re not just seeing growth in one sector or at one customer,” he added, referring to the auto market.
Texas Instruments has the highest dividend growth in semiconductors, says a Citigroup report, so it’s looking for long-term bets like autos.
The auto opportunity for semiconductor firms goes beyond ADAS and autonomous vehicles, says Webber at Strategy Analytics.
South Korea’s Samsung, one of the biggest smartphone makers, in October agreed to buy U.S. auto-parts supplier Harman International Industries (HAR) for $8 billion. Harmon makes infotainment systems and connected-car technology. Japan’s Panasonic in December bought ZKW Group for $880 million.
Another area of automotive opportunity, Webber says, is the emergence of powertrains built for electric and hybrid vehicles. Powertrains, which control engines and handle other tasks, account for about 30% of all chip content in cars.
Powertrain chip revenue will grow more than 7% annually to $7.68 billion in 2020, says Strategy Analytics. Infineon, STMicroelectronics and NXP are the biggest providers of powertrain technology, followed by Germany’s Bosch and Texas Instruments.
Gartner forecasts that in-vehicle infotainment systems will be included in 22% of cars by 2020, up from 13% in 2015. Infotainment systems, about a $6.5 billion market, account for about 25% of chip content in autos. Automakers are pushing to add music, internet and wireless features, since they charge $3,000 and up for infotainment and navigation packages.
Many semiconductor firms, such as Maxim, sell chips into different categories. Maxim makes chips for infotainment, battery management and other areas. Maxim has told analysts that it has 20 auto customers above $10 million in annual revenue. Maxim expects the automotive market to provide double-digit revenue growth for “multiple years,” says a Barclays report.