Driverless cars could reach public roads worldwide within the next decade, according to most industry forecasts. As a result, many companies are expanding into driverless technologies, like computer vision chips and navigation systems. But before you invest in companies that are tapping into the growth of this fledgling market, you should read these three tips about the driverless market.
1. Understand what the company sells
Plenty of chipmakers claim to sell chips for driverless cars, but investors should understand the differences between these chips. NXP (NXPI -1.57%) and Texas Instruments (TXN -0.15%), for example, manufacture automotive chips that control a wide variety of functions within standard, connected, and driverless cars.
Nvidia (NVDA -1.58%) and Qualcomm (QCOM -1.88%) sell ARM-based processors (which were primarily used for mobile devices) for infotainment and navigation systems in high-end vehicles. These newer chips are equipped with computer vision capabilities, which are essential for advanced driver assistance systems (ADAS). Mobileye (MBLY), which sells ADAS based on cheaper camera and radar technologies, is the leader in this market and serves about 90% of leading automakers worldwide. Mobileye also sells a computer vision processor, the EyeQ series, for its newer ADAS and driverless systems.
Nvidia is trying to leverage its early growth in the automotive industry to convince customers to use a driverless platform called Drive PX, which is an all-in-one development platform for autonomous cars. NXP also unveiled a similar platform, BlueBox, which it gained through its acquisition of Freescale last year. Intel (INTC -0.82%), which is notably falling behind the ARM-based players, recently made two driverless tech acquisitions (Yogitech and Itseez), then partnered with Mobileye and BMW on autonomous vehicles to keep up.
2. Understand where the revenue comes from
Mobileye is a "pure play" on driverless cars, but the other chipmakers I mentioned all generate most of their revenue from other businesses. NXP's automotive revenue (which includes Freescale's sales from last year) rose just 1% annually last quarter and accounted for 34% of its top line. TI's automotive revenue rose by the "mid-teens" last year and accounted for 15% of its top line.
Nvidia's automotive revenue, which entirely comes from connected and driverless tech, rose 47% annually to $113 million, which accounted for 9% of its revenue. But unlike NXP and TI, which are weighed down by slower sales of chips for other markets, the rest of Nvidia's top line is supported by strong demand for its GPUs for gaming, graphics, and data center purposes.
Qualcomm and Intel don't disclose how much of their sales come from automotive chips. Investors should also note that although Apple and Alphabet's Google are frequently mentioned in discussions about autonomous vehicles, neither company generates meaningful revenue from that market yet.
3. Mind the valuations
Investors might consider these facts and conclude that Mobileye, which posted 68% sales growth and 129% non-GAAP earnings growth last year, is the best way to directly invest in ADAS and driverless cars. However, many investors had that same idea and that's why the stock now trades at a lofty 141 times earnings. Its forward P/E of 46 is in line with its projected earnings growth of 44% of this year, but a slight earnings miss could cause its stock to plummet.
Nvidia might seem like the second-best play, but a lot of optimism is already baked in the stock, which trades with a trailing P/E of 46 and a forward P/E of 34. However, it's still trading at a discount to its estimated earnings growth rate of 45% for the year.
NXP and TI, which respectively trade at 11 and 20 times forward earnings, are considered cheaper but less direct ways to invest in driverless cars. Investors should evaluate the strength of both companies' other businesses -- like NFC chips for NXP and industrial machinery, consumer electronics, and communications for TI -- before investing in them. Both companies are also major iPhone suppliers, which means that declining sales of iPhones could easily offset any growth from connected and driverless cars.
Don't get caught up in the hype
"Driverless" is the newest buzzword among chipmakers, but investors should take industry forecasts with a grain of salt. Collisions between driverless and traditional cars indicate that driverless vehicles will probably only work optimally alongside other driverless vehicles. Recent accidents involving Tesla's Autopilot feature highlight the dangers of placing too much faith in ADAS. Therefore, investors should view driverless tech as a potential tailwind for most companies, instead of a game-changing catalyst.