Many tech companies and automakers believe that driverless cars will hit public roads within the next decade. Those expectations have fueled a land grab in driverless technologies, and many companies with exposure to that market have rallied over the past year.
As a result, many of the obvious plays in that sector -- like Mobileye, Nvidia, and Tesla Motors -- have fairly high valuations. More value-oriented investors might want to seek out more overlooked and undervalued companies with exposure to the driverless market.
In a previous article, I highlighted NXP Semiconductors (NASDAQ:NXPI) and Delphi Automotive as undervalued plays on driverless cars. Today, I'll focus on two other players with attractive valuations -- Qualcomm (NASDAQ:QCOM) and Baidu (NASDAQ:BIDU).
Qualcomm, the world's biggest mobile chipmaker, will likely acquire NXP Semiconductors, the world's top automotive chipmaker, for over $37 billion in the near future. Once that deal closes, Qualcomm will become the 800-pound gorilla in the automotive chips market.
Over the past few years, Qualcomm has gradually lost market share in mobile devices to cheaper rivals like MediaTek and first-party chips from major OEMs like Apple, Samsung, and Huawei. To offset those losses, Qualcomm aggressively expanded into Internet of Things (IoT) devices, drones, connected cameras, and connected cars.
Prior to the NXP deal, Qualcomm acquired IoT and automotive chipmaker CSR for $2.4 billion last year, and launched a line of Snapdragon Automotive chips for infotainment and navigation systems. Buying NXP (which expanded its automotive business by buying Freescale last year) will add a wide variety of automotive chips, along with the turnkey driverless platform BlueBox, to Qualcomm's portfolio.
The exact impact of the merger will be hard to gauge until the deal is formally announced, but Qualcomm currently trades at fairly low multiples. Despite rallying 35% this year, Qualcomm still trades at 20 times earnings -- which is lower than the average P/E of 22 for broad line semiconductor companies.
Baidu, the top search engine in China, announced in June that it would put driverless cars on public roads within the next five years. Like its American counterpart, Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google, Baidu doesn't plan to mass produce the cars by itself. Instead, it plans to outsource the production to existing automakers, with the first Baidu-branded vehicle set to arrive in 2018. That vehicle will be a driverless shuttle bus programmed to run in a loop.
Last December, Baidu started testing out its driverless technology on a fleet of BMW 3-Series GTs in Beijing and Wuhu. Earlier this year, Baidu established a driverless tech research center in Silicon Valley, with the goal of testing out autonomous cars in the U.S. in the near future.
Baidu's growing interest in driverless cars comes at a time when Chinese tech companies are battling over online-to-offline (O2O) services (like hailing cabs, ordering movie tickets, making dinner reservations) instead of simple online searches. As ride-hailing apps and driverless cars both grow in popularity, they will likely converge with apps for hailing autonomous taxis.
When that happens, Baidu's expansive ecosystem of search, maps, mobile payments, and O2O services could help it dominate the market by leveraging its users' dependence on those core services. While that ambitious goal might take years to reach, Baidu remains fairly cheap at 13 times earnings -- which is much lower than the industry average of P/E of 50 for internet information providers.
Take the long view...
Qualcomm and Baidu still trade at relatively low multiples because many investors are worried about their near-term headwinds. Qualcomm still faces tough competition in smartphone chips, and its higher-margin licensing business remains under pressure from defiant OEMs and government regulators. Baidu's margins have declined over the past few years due to its increased spending on new markets like O2O services and driverless cars.
Investors are wise to question Qualcomm and Baidu's ability to clear those big hurdles, but they should also note that both companies are well-poised to capitalize on the growth of driverless cars. Moreover, their fairly low valuations indicate that they might have more upside growth potential than more richly valued driverless stocks like Nvidia and Mobileye.