Autonomous cars are coming. In fact, they are already driving among us. With semi-autonomous features set to roll out from major automakers in the coming months, now is an excellent opportunity for investors to strike before the mass public becomes familiar with the new technology. This article will introduce two stocks whose technology will enable the mounting tidal wave of autonomous safety aids, and reveal why investors should be excited about their specific prospects.
Automotive autonomy is poised to reshape a multi-trillion-dollar mobility industry and in the process could spur something of a technological gold rush. In the original gold rush, the people who made the most money weren't the prospectors, but the businesses selling pickaxes. That should hold true this time around as well. It is easy to get excited about the headline names -- "Google!" "Tesla!" -- but it's wiser to look instead to the businesses supplying critical components that will make this whole driverless future a reality. After I did some digging through the supply chain, two different stocks revealed themselves: one a classically expensive pure play and the other a diversified supplier that should appeal to value investors.
The growth stock
There is only one stock that is a pure play in vehicular autonomy: Mobileye (MBLY). Founded 15 years ago, Mobileye has really picked up steam over the last few years as its technology advanced, culminating in an IPO in August 2014. In short, Mobileye gives a car the ability to see. Mobileye uses a camera-based system combined with advanced software that identifies and make decisions regarding lanes, pedestrians and other vehicles. This allows for advanced driver assistance systems (ADAS) like lane-departure warnings, collision prevention, adaptive cruise control, dynamic lighting -- pretty much any modern safety feature touted in a car commercial.
Mobileye has signed an impressive number of OEMs (original equipment manufacturers) and tier-1 suppliers (which directly integrate systems for the OEMs) as clients, 23 in all, with a projected base of 244 different car models using Mobileye tech by 2016. To put this in perspective, in 2010 Mobileye had only seven OEMs as clients and just 36 car models featuring its technology. Without real competition, Mobileye now controls upward of 80% of the market; the company won every single contract it bid on last year. The race is on to see how deep it can dig its moat and entrench itself into manufacturers' systems. Given what is at stake -- passenger safety -- it will be difficult for another supplier, with an untested product, to come in and displace Mobileye in the future.
I wouldn't blame you from averting your eyes from the stock's current valuation. At a price-to-sales ratio of 63, this isn't a stock currently driven by its fundamentals; growth stories like this rarely are, and they often have a way of outperforming already high expectations. As Mobileye is largely a software company, its margins and free cash flow should get increasingly attractive as its business expands. Autonomous driving will be gradually phased in as part of advanced driver assistance systems, and Mobileye will be a part of the growth of the industry from the beginning. If the stock can match Wall Street's estimates and average 60% growth per year, Mobileye's revenue will grow from under $150 million to just shy of $1 billion by 2020 and earnings will increase 10-fold. This stock is positioned on the front lines of a revolution where only the first shots have been fired. It will take time for this story to play ou; even management acknowledges that the revolution will come in stages.
The value stock
Delphi (DLPH) is an established auto-parts supplier with a history of financial problems, so it might surprise investors that the company is poised to dominate this new frontier. Like its former parent company General Motors, Delphi emerged from bankruptcy with a substantially improved balance sheet and without unnecessary legacy business lines. It is now set to be the premiere integrator of autonomous technologies, supplying a complete solution to OEM manufacturers. Delphi has continued to strengthen itself for the future, adding safety system supplier MVL for $972 million in 2012 and selling its thermal business for $727 million earlier this year. Delphi was not scared by M&A under outgoing CEO Rodney O'Neal, and I expect that to continue with CFO Kevin Clark's hand at the helm.
In some ways, Delphi is an easier pitch than Mobileye: Sure, it doesn't have quite the explosive growth potential, but at the same time Delphi's broader footprint gives it a hand in other major automotive trends outside of autonomy, like fuel efficiency and safety tech. It also helps that the stock is incredibly cheap. This is a company that has grown sales 10% to $17 billion and net income 25% to $1.35 billion over the past three years.
What is more exciting is where Delphi is going. Analysts expect the stock to grow roughly 15% each year for the next five years, and margins should improve as its thermal business is off the books and the company moves into cutting-edge technology. All of this leads to Delphi having a forward P/E of 13.3 and a PEG ratio under 1.2, which is about as good as you are going to find after years of massive market gains. In a world where autonomous capability is a must-have and as the importance of light weighting and fuel efficiency grows, Delphi is potentially on track to add more value to a vehicle than some of the OEMs it calls customers.
Room for two
Mobileye and Delphi aren't direct competitors; in fact, they currently exist in complementary roles. Just last week, Audi announced that Delphi would be supplying its vehicles with an autonomous driving unit featuring Mobileye technology. A test Audi SQ5 carrying Delphi engineers just successfully finished a coast-to-coast road trip that was essentially fully autonomous. Both play a critical role in what will be one of the largest changes to how we travel since commercial aviation. And with these two stocks, investors don't have to pick brands and try to figure out consumer tastes -- you can just sit back in the comfort of knowing that in the future, almost any vehicle with an advanced safety system, either semi- or fully autonomous, is likely powered by Mobileye and Delphi.
