Top 3 Automotive Semiconductor Stocks To Buy

Seeking Alpha2021-10-06

Summary Despite the automotive market being at a mature stage with average vehicle unit sales growth projected at 1.24% annually to 2030, we find the use of semiconductor chips in vehicles. ...

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Automotive accounts for 10% of the semiconductor market. Although the outlook of vehicle sales in terms of unit sales growth is flattish as the average vehicle age continue to rise due to increased reliability and better maintenance capabilities as well as the rise of alternative transportation modes such as the emergence of ride-sharing, semiconductor growth is still expected to be strong driven by rising automotive features and functionalities across safety, infotainment, connectivity and automation. In this analysis, we analyzed the trends of rising chip content per vehicle across the automotive MCU, ADAS SoC and LED chips with the evolution of technological advancements which is a continuous trend across centuries since the invention of the automobile. The global vehicle sales growth has averaged at 1.9% since 2011. Among several factors driving growth includes rising GDP per capita of 2.1% on average in the past 10 years. We estimate the GDP per capita to rise by 2.7% until 2030 based on global GDP and population growth forecasts.\nSource: OCIA, MacroTrends, Khaveen Investments\nAlthough GDP per capita is rising, vehicle sales have been diverging from GDP growth as the average age of vehicles is also increasing to 11.85 years in 2020 worldwide on average. Vehicle owners are more comfortable holding cars longer because cars are more reliable than in the past and vehicle service contracts and other insurance products mitigate repair costs. IHS Markit predicts that the average vehicle age to continue rising, we expect this to be negative to vehicle growth as consumers hold on to their vehicles longer.\nSource: WolfStreet, Statista\nMoreover, we also expect the rise of the ride-sharing market to weigh on vehicle sales growth as people opt for alternative modes of transport. We assumed that the expected rise of ridesharing drivers to affect vehicle sales based on studies from MDPI which indicates that between 2 to 4.5 of vehicles could be replaced per ridesharing driver, Thus, we accounted for this trend in our projections by estimating the number of global ridesharing drivers at 14.2 mln and increasing by an average rate of 4.8% annually through 2030. Overall, we expect the vehicle unit sales growth to remain flattish beyond 2022 and derived a projected vehicle growth rate of 1.24% from 2023 to 2030.\n* E = B x C;A = E - F.Source: OCIA, Statista, MacroTrends, Khaveen Investments\nSource: OCIA, Statista, MacroTrends, Khaveen Investments\nIn 2020, the top automaker by sales is tabulated below with Toyota and Volkswagen as the top 2 leading automakers in the world. These automakers have set targets to produce more electric vehicles for example BMW (OTCPK:BMWYY) is pushing for 15% to 25% of sales to be electric vehicles by 2025 while Honda (HMC) is striving for two thirds by 2030.\nTop Automakers in the World (2020)\nSource: OICA\nSource: OICA\nThe chart below shows the timeline for the deployment of advanced driver assistance systems with the vision of fully automated driving. The increasing adoption of more advanced features and functionalities are key for semiconductor growth as more content is required to power more complex electronics. Since the 1980s, the number of technologies and functionalities that provides an enhanced driving experience has increased with the rise of features such as ABS, adaptive cruise control, blind-spot warning, collision warnings, etc. In the future, more functionalities and support are expected to be adopted in vehicles like automated parking, on-demand mobility and even fully autonomous vehicles.\nSource: ResearchGate\nOverall, the rising applications of advanced automotive features and functionalities could spur the growth of the semiconductor market. For example, microcontrollers are used to control air conditioners, power windows, braking, headlights, and steering. Its adaptability and flexibility provide high performance and low power consumptions and the increasing demand for comfort, safety and fuel economic vehicles drives the automakers to introduce more microcontrollers. With increasing vehicle autonomy, advanced ADAS SoC chips will be increasingly crucial to enable seamless driverless vehicle performance. Furthermore, the rise of EV and AV could also spur the growth of LEDs for automotive interiors as automakers capitalize on the benefits of driverless vehicles providing passengers with more freedom and seek greater comfort and atmosphere through enhanced lighting.\nAutomotive Microcontrollers\nA microcontroller gathers input, processes this information, and outputs a certain action based on the information gathered. The increasing demand for comfort, safety and fuel economic vehicles drives the automakers to introduce microcontrollers. These new functions require local intelligence that can only be optimized using powerful microcontrollers. Microcontrollers ensure robust functionality in a harsh environment. Intense competition among automakers drives them to seek an innovative solution to differentiate their vehicles without compromising safety and cost. Microcontrollers in automobiles are present in large equipment to small devices and are used to manage air conditioners, power windows, braking, headlights, and steering. Microcontroller's adaptability and flexibility provide high performance and low power consumption and bring a revolutionary change in all aspects of the automobile industry.\nSource: ee News\nThe communication in automobiles, which is established by various microcontrollers, has control over both fail-safe systems and automotive fault-tolerant systems, where the microcontrollers cannot only serve to respond to mishaps and faults that occur to the car (anti-lock brake interference, accelerator, and broken lights), but also to duplicate as secondary units that continuously check the car (anti-lock brake interference, accelerator, and broken lights). When the car tires slip on a snow-covered road, this is an example of fault tolerance. The incident elicited a response from the driver, but it was also detected by a sensor microcontroller, which engaged the anti-clock braking system when the driver slammed on the brakes.\nFrom 1998 to 2011, we estimate that the number of MCUs in an average vehicle has grown at a CAGR of 8.2% from 18 to over 50 MCUs as functionalities and features rise and become more common such as airbags, steering, suspension, braking, body control functions and power train. Premium vehicles have greater adoption of advanced functionalities thus requiring greater MCUs. An electronic control unit (ECU) is an embedded systeminautomotive electronics that controls one or more of the electrical systems or subsystems in a vehicle with MCUs as the main chip of the system. For example, a BMW 7 series in 2018 is estimated to have over 150 ECUs than the same model in 2014 with 65 between 60 to 65 ECUs which translates to a CAGR of 23.3% in the period as more advanced functionalities were introduced such as stability management systems, GPS based navigation systems, By-wire steering and braking systems, voice recognition; collision warning systems. With the continued development of new technologies and adoption across vehicles, the MCU content per vehicle is expected to rise with new features such as blind-spot information system, reversing assistant, adaptive cruise control, active roll mitigation, night vision assist, driver fatigue alert, rear cross-traffic alert, etc.\nSource: Elprocus, Kpit, Khaveen Investments\nThe market players in the automotive microcontrollers market include Renesas (OTCPK:RNECF), NXP(NASDAQ:NXPI), Infineon (OTCQX:IFNNY), Texas Instruments (TXN) and Microchip Technology (MCHP). Renesas and NXP are the market leaders with former leverages on its dominant market share in MCU and its broad product portfolio. The latter offers comprehensive solutions for safe, connected vehicles and its S32G high-performance processor can significantly enhance calculated performance while simplifying software complexity. Infineon is a leader in the production of system-on-chip solutions for automotive applications using the C16x architecture and the award-winning 32-bit Tricore architecture. Texas Instruments leverages technology to introduce an all-encompassing solution. Microchip Technology has a wide breadth of a portfolio of automotive-grade microcontrollers (MCUs).\nMarket Share of Automotive Microcontrollers (2018 to 2020)\nSource: Infineon, Strategy Analytics\nBased on the market share data from Strategy Analytics, Renesas and NXP are the top market leaders with market shares above 26% in 2020 respectively. However, competition is heating up as Infineon has gained market share to 16.9% in 2020 and 2019 as it acquired Cypress Semiconductors. The other companies trailing behind are Texas Instruments and Microchip. These companies cater to demand from leading automakers and Tier 1 suppliers listed in the table below. We see Infineon's strengths as having a wide customer base especially following its acquisition of Cypress in 2018 which further broadened its customer base to 11 automakers and Tier 1 manufacturers.\nSource: Renesas, Dun & Bradstreet, PRNewswire\nTop Pick: Infineon\nInfineon is a leader in the production of system-on-chip solutions for automotive applications using the C16x architecture and the award-winning 32-bit Tricore architecture. Infineon's product portfolio also includes infotainment-specific microcontrollers, Bluetooth, cellular and GPS controllers, as well as high-frequency ICs, power semiconductors, LEDs and optical transceivers. Following the acquisition of Cypress, it has expanded its MCU product offering spanning across the entire automotive stack.\n\nInfineon also recently developed its Traveo II Body microcontroller family. With this product family, Infineon can address a broad variety of automotive applications, including body control modules, door, window, sunroof and seat control units as well as in-cabin smartphone terminals and wireless charging units. This launch follows Infineon's acquisition of Cypress Semiconductor Corporation, which contributed to the product family. Infineon has also introduced its second-generation AURIX (TC3xx) microcontrollers. These are the first embedded safety controllers worldwide to be certified for the highest automotive safety integrity level (ASIL D). Moreover, with the commissioning of the fab in Villach that makes chips on large, 300 mm wafers, Infineon will add a twin to a similar plant in Dresden, Germany and thereby gain flexibility in production.\nOverall, the automotive MCU market consists of various top players with broad product developments and extensive customer bases. Though, we believe that Infineon is the best among the auto MCU suppliers following its acquisition of Cypress which expanded its product offerings across the entire automotive stack and it has key relationships with at least 4 of the top automakers and a large base of Tier 1 manufacturers. Based on our DCF valuation with a discount rate of 9.5% (company's WACC), our model shows an upside of 25.77%.\nSource: Khaveen Investments\nADAS Soc\nThe growth of the automotive vehicles market is attributed to the rising number of benefits offered by an unmanned vehicle as compared to traditional vehicles such as reduced road-crash risk, enhanced safety & security, elimination in driver wages, secured mobility for disabled individuals and non-drivers, and increased comfort and flexibility offered by seamless operative systems. Autonomous vehicles are expected to account for about 12% of vehicles by 2030 representing an average annual growth rate of 73.2% by 2030. Assuming that 1 ADAS per vehicle, we assume that the annual growth rate for ADAS to be also at 73.2%.\nSource: Statista, Khaveen Investments\nThe role of ADAS is to prevent accidents and injuries through more sophisticated vehicle systems. Essential safety-critical ADAS applications include pedestrian detection/avoidance, lane departure warning/correction, traffic sign recognition, automatic emergency braking, blind-spot detection, etc. These systems incorporate the latest interface standards and running multiple vision-based algorithms to support real-time multimedia, vision co-processing, and sensor fusion subsystems. With increasing autonomous capabilities and complexities, more advanced SoCs are required. Hardware designs are becoming increasingly complex and using more advanced nodes to meet performance requirements, its main role is to connect sensors to actuators through interfaces and high-performance ECUs (electronic controller units). The degree of self-driving capabilities is separated into 5 levels.\nSource: Synopsys\nVehicles capable of sensing their environment with the increasing shift towards higher vehicle autonomy requires an increase in the electronic architecture of these vehicles. New integrated domain controllers require higher computing performance, better power efficiency and smaller forms. Mobileye was acquired by Intel (INTC) in 2017 and is developing its EyeQ product line while Qualcomm (QCOM) is trying to expand its presence in the market with the introduction of its Snapdragon Ride Platform. Though, we believe that Nvidia (NVDA) has several advantages over competitors in terms of anticipated performance and product roadmap and securing design wins across major automakers and Tier 1 suppliers.\nSource: Company data, Research and Markets, Khaveen Investments\nTop pick: Nvidia\nNvidia's product development with its Nvidia Drive lineup has been impressive. It introduced the Drive AGX Orin software-defined platform for L5 autonomous driving in 2019 with nearly 7x greater performance than previous-gen Xavier SoCs delivering over 2,000 TOPS with the integration of its GPU solutions. It is expected to begin mass production in 2022 based on Samsung's 8nm process. NVIDIA DRIVE ADAS platform is powered by Orin SoCs for active safety, automated driving, parking applications and AI cockpit capabilities. In comparison with Mobileye's EyeQ 5, the performance achieved is believed to be 24 TOPS but at a lower power consumption of 10 W than Nvidia's 750 W power consumption whereas Qualcomm's Snapdragon platform scales from 30 TOPS for L1/L2 to 700 TOPS at 130W for L4/L5.\nMoreover, another advantage that Nvidia has is its growing adoption of its SoCs by leading automakers. The company has 44 cars and 13 trucks Nvidia Drive partners as well as several robotaxi, Tier 1 suppliers, sensor and software partners. For example, it counts on Toyota and Mercedes Benz as two of the top automakers globally. Also, Volvo Cars, Zoox and SAIC are among the growing number of leading companies using the newest NVIDIA Drive solutions for their autonomous vehicles. Nvidia's automotive design win pipeline stood at $8 bln over the next 6 years. Whereas, Mobileye is active in 49 production programs across over 25 OEMs with key partners such as BMW, Geely (OTCPK:GELYF) and Ford.\nSource: Nvidia\nOverall, despite Intel's current market leadership, we believe Nvidia to be the most promising in advanced ADAS SoCs due to its extensive partnerships with major automakers including Toyota, Mercedes Benz and Volvo and has 53 Nvidia DRIVE partners as well as Tier 1 manufacturers and software providers. Moreover, its touted Orin SoC appears to be highly promising with an impressive performance of up to 700 TOPs. As in our previous analysis on Nvidia, we valued the company based on a P/S valuation. Automotive accounts for only around 3% of revenues in FY2020 but we expect it to grow to above 8% of revenues by 2025 at a CAGR of 73.2% based on our projections of AV growth. Additionally, our base case assumes a 50% probability based on its continued progress to complete the Arm deal but also the regulatory approval headwinds. Moreover, we assume 100% of our derived synergies for the combined company to be realized through the acquisition.\nSource: Khaveen Investments\nOur 1-year average price target for the bear, base and bull case is $271.34.50, $289.40, $318.22 with of an upside of 21.2%, 29.2% and 42.1%\nSource: Khaveen Investments\nAuto LEDs\nAn LED is a diode that converts electrical energy into light. LEDs are almost 90% more efficient compared with halogen and incandescent lights due to their high-power efficiency and long-lasting nature. Rising demand for LEDs in vehicles is driven by stricter road safety regulations on vehicle lighting to promote passenger safety. The key advantages of LEDs are its design flexibility offered to automakers to accentuate their vehicle designs. Examples of applications where LEDs can be used are headlamps (high and low beam), brake lights, rear combination lamps, centre high mount stop lamps, daytime running lamps (DRLs), turn signals, interior reading lights (map lights), dome lights, accent lights, fog lamps, and position and marker lamps. Also, interior lighting is another area that could provide tremendous opportunities for LED adoption such as in ambient lighting, dashboard and instrument lighting. According to TrendForce, the LED penetration rate for cars has reached 53.1% in 2020 with the LED penetration rate for electric cars at 85% in 2020 and are likely to hit 60% and 90% in 2021 respectively. Besides that, the total number of LEDs for exterior and interior is expected to grow to 330 per vehicle in 2021 compared to 200 in 2019 and representing a CAGR of 28.45% with the additional innovative features. From 2010 to 2019, we estimate the CAGR to be around 16.65% from 50 LEDs per vehicle to 200 in 2019. Though, advancements in manufacturing processes are attributed to the declining ASPs of LEDs which has declined at a CAGR of -12% between 2010 to 2020. We expect that the continued advancement in LED manufacturing to result in declining ASPs by around a 5% CAGR by until 2030.\nSource: LED Professional, Osram, Khaveen Investments\nSource: Osram\nTop pick: Osram ('ams')\nIn 2020, the key market leaders in the automotive LED market are Osram, Nichia and Lumileds which together accounted for 71.8% of the total market. Osram has consistently maintained its market leadership since 2018 as the number one player in LED packages with a market share of 36% in 2020 from 34.4% in the prior year. Based in Japan, Nichia is a top producer of LED packages which are characterized by high efficiency, flexible cluster configurations, and high luminous flux density. The company is a partner of Infineon and are also developing microLED technologies through a partnership. It claims that its new LED matrix will offer 180 times greater resolution than comparable solutions currently available. Furthermore, Lumileds is the third-largest LED chip company with a market share of 12.2% in 2020. The company is affiliated with Philips Lighting which serves automakers including Citroen, Ford, Kia (OTCPK:KIMTF), Tesla and Volkswagen. It also offers retrofitted LEDs to the German market allowing drivers to upgrade their headlights from halogen to Philips LED for safer driving.\nThough, we favor Osram as the leading LED supplier due to its solid market leadership, continuous product development and integration opportunities with ams'(OTCPK:AMSSY)optoelectrical solutions. Based in Germany and with a history of more than 100 years, Osram counts on the major German automakers with the likes of Volkswagen, BMW, Audi as partners.\nSource: LEDInside\nThe company has a broad product portfolio of LED technologies for various aspects of vehicle lighting. It has collaborated with these automakers in product development such as with laser headlight technology as seen in the BMW i8 and the Audi (OTCPK:AUDVF) R8 LMX. Moreover, the company launched microLED developments and its Evyios hybrid headlamp module with 25,600 pixels based on MicroLED technology. For more conventional LEDs, Osram's products are also used by its customers such as in the Audi A8.\nThe business integration between ams and Osram is underway following the completion of the acquisition by ams. The combined company is running a broad set of programs to drive the creation of synergies and optimize its combined business portfolio. In terms of product innovation from the combined business, management has announced that portfolio alignment is in progress. The combined company possesses an outstanding technological and IP strength with over 15,000 patents. The integration of optics technologies, illumination and sensing across multiple active developments creates emerging opportunities in the automotive segment with a significant development focus including next-gen automotive lighting technology such as highly pixelated headlights and head-up display integrating AR to assist the driver and increase road safety. In addition, the company is also focusing on autonomous driving technologies with LIDAR and ADAS. The combination of ams and Osram edge-emitting laser and VCSEL capabilities for different LIDAR architectures put it in a unique position with a broad portfolio and leveraging the larger customer base of the combined firm.\nOverall, we believe that Osram which is owned by AMS to be the most promising LED chipmaker due to its solid market leadership as the leading player and exciting product development spanning across various LED technologies. Not to mention, we previouslyanalyzed the integration benefits between Osram and AMS' sensor resulting in a massive portfolio of product patents with key developments in LiDAR and microLEDs for EV and AV. Based on our DCF valuation with a discount rate of 7.1% (company's WACC), our model shows an upside of 28.65%.\nSource: Khaveen Investments\nVerdict\nDespite the flattish growth outlook of automotive sales in units at a projected rate of 1.24%, the rising semiconductor content in vehicles driven by the rising adoption of modern vehicle features and functionalities for safety, entertainment and connectivity bodes well for the semiconductor players. For example, we expect that with increasing vehicle functionality and more complex electronic systems in vehicles, the rise of MCU content in vehicles could continue at a long-term CAGR of 11.18%. With an extensive portfolio across the automotive stack, we believe Infineon could be a prime beneficiary of the growth opportunity with many relationships with automakers and Tier 1 suppliers. Moreover, the future rise of autonomous vehicle capability is expected is to drive demand for advanced ADAS SoCs in vehicles and we projected AV sales to grow by an average annual rate of 73.2% to 2030. Nvidia has extensive client wins of Nvidia Drive partners with a strong portfolio and roadmap. Lastly, we expect the rising LED adoption and content growth in both vehicle interior and exterior with a projected market growth rate of 12.9% to 2030 to benefit companies like Osram as our top pick as the leading LED chip supplier with key relationships in the German automobile industry and integration opportunities with ams. Overall, we rate Infineon as aBuywith a target price of $54.37, Nvidia as a Buy with a target price of $289.40 and ams AG as a Buy with a target price 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