Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Qualcomm's Acquisition of Veoneer Could Make It an Unstoppable Connected Car Stock

By Nicholas Rossolillo – Oct 7, 2021 at 5:57AM

Key Points

  • Qualcomm and SSW Partners just outbid Magna for auto tech company Veoneer.
  • Qualcomm has been building a platform to address growing automaker demand for advanced driver assist systems.
  • Qualcomm's auto segment will be small even after adding Veoneer, but it could quickly emerge as a leader in auto tech system designs.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Qualcomm is looking to build up its business beyond just smartphones.

A more connected mobile world is being built in earnest. However, a key piece of consumer hardware squarely in technology companies' crosshairs is vehicles. Often running on chips and circuitry that are decades old, many automakers are scrambling to get their models up to date with the latest in connectivity, electric drivetrains, and advanced driver assistance systems (ADAS).

To that end, it shouldn't go unnoticed that Qualcomm (QCOM 0.17%) and investment firm SSW Partners just reached a definitive agreement to acquire auto tech company Veoneer (VNE). The deal values the small technologist at $4.5 billion (to be paid as $37 per share in cash to Veoneer shareholders). This buyout could let Qualcomm, a leader in mobile chips for smartphones and related devices, seriously ramp up its presence on the road. Here are three reasons why.  

Someone sitting in a self driving car talking on a phone.

Image source: Getty Images.

When chip designers also become auto suppliers

It's clear Qualcomm really wants in on the auto industry, and for good reason. Tens of millions of vehicles are sold globally every year, and by the end of this decade, an estimated half of a car's cost of production will be electronic components (up from about 40% now). As a result, one of the most profitable parts of the auto industry supply chain is high-end tech.

Thus the agreement to acquire Veoneer, which reports in two primary segments: Active safety (i.e., ADAS) and restraint control systems (tightening of seatbelts and deployment of airbags in case of an accident). Qualcomm and SSW Partners actually outbid Canadian auto supplier Magna (MGA 1.01%) for Veoneer, which had offered Veoneer shareholders $31.25 per share in cash this past summer.

But Qualcomm isn't interested in airbags and seatbelts. SSW Partners will retain that business segment and sell the active safety division to Qualcomm, which will augment its own ADAS platform with Veoneer's software and designs for sensors including radar, LiDAR, camera-based vision, and the like. Paired with Qualcomm's mobile processors, the auto industry will have a new powerful product partner for designing advanced safety controls, progressively more autonomous vehicle functionality, and connectivity features.

Creating compelling reasons to upgrade chip designs

Unifying more parts and systems of a car to a single supplier can help an automaker boost profit margins. After all, bulk orders often mean lower average cost per unit purchased.

But for Qualcomm, its strategy is more than just boosting how many pieces of a vehicle's tech system it can sell. It's also about creating a compelling platform that automakers will spring for in the first place. After all, many components are mission-critical in a car, so a tried-and-true system is better than upgrading to the latest circuitry designs that might require a total overhaul for auto engineers.  

Thus, Veoneer is only part of a grander strategy. This past summer, Qualcomm also purchased CPU designer NUVIA. NUVIA's CPUs will find primary use in smartphones and laptops. But at the time the acquisition was made, Qualcomm said NUVIA will also be applied in other emerging departments for Qualcomm, like digital cockpits (the multiple digital screens displaying info within new cars that have mostly replaced traditional instrument clusters) and driver-assist systems.  

Put another way, Qualcomm is stitching together multiple technologies via acquisition and its own in-house development for all sorts of tech within the modern vehicle. If it can update enough of these components and get them all working together fluidly, it might be able to convince automakers to start upgrading to newer (and more profitable, for Qualcomm) semiconductors and related hardware. 

Diversifying away from future "legacy" products

Through the first nine months of its 2021 fiscal year, over three-quarters of Qualcomm's business is derived from the mobile industry -- mostly component designs for smartphones. Qualcomm has a stranglehold on some of these mobility chips, but it could be facing losses in this department in the years ahead. Apple, for example, acquired Intel's mobile modem business. This is clearly a shot at Qualcomm's very profitable smartphone supplier relationship as Apple may intend to bring modem design in-house.

But Veoneer will help Qualcomm up its game on a new front. Qualcomm's auto segment hauled in just $253 million in the last reported quarter (or a measly 4% of total revenue). Veoneer's active safety division hauled in $197 million in its latest quarter. Once combined, Qualcomm could be looking at a nearly 80% jump in automotive sales including the acquired business -- with much more growth on the way if it can convince more automakers to use its expanding connected vehicle platform.

To be sure, automotive products would still represent a small fraction of Qualcomm's total business even after adding Veoneer, but it's well on its way to extending its mobility chips to the auto world. Advanced driver assist systems, vehicle autonomy, and connectivity are still early on in development, and Qualcomm clearly has its sights set on being a leader in this space.

Nicholas Rossolillo and his clients own shares of Apple. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool recommends Intel and Magna Int'l and recommends the following options: long January 2023 $57.50 calls on Intel, long March 2023 $120 calls on Apple, short January 2023 $57.50 puts on Intel, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Qualcomm Stock Quote
$126.71 (0.17%) $0.22
Apple Stock Quote
$147.83 (-0.14%) $0.20
Intel Stock Quote
$29.87 (-0.67%) $0.20
Magna International Inc. Stock Quote
Magna International Inc.
$62.21 (1.01%) $0.62
Veoneer, Inc. Stock Quote
Veoneer, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.