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If You Love Self-Driving Cars, You Should Check Out NXP and NVIDIA

By Anders Bylund - May 14, 2016 at 11:24AM

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You don't have to buy Detroit stocks to invest in the future of the car industry. Take a look at the very brains of those self-driving vehicles instead.

Let's skip to the chase: Self-driving cars are going to be The Next Big Thing (tm). Here's how you can make big money from this revolution, no matter which carmaker or technology platform comes out on top.

The current situation

Since Alphabet started leading this futuristic idea out into the mainstream, the car industry itself has turned in that direction. Name a carmaker, and I bet the company has developed at least the embryo of a self-driving platform. You can already find traces of this upcoming revolution inside current cars, powering automatic parallel-parking systems or highway-speed autopilots.

Whether you're looking at Detroit, Japan, or Germany, you'll see plenty of self-driving vehicles coming out of those industry hotbeds soon enough. This technology will save lives, lighten the monotony of your commute, and eventually do away with the need to buy a personal vehicle in the first place.

But all of that is still several years down the road. More importantly, how do you invest in surefire winners when the entire car industry is chasing the same pot of gold?

It's actually not hard at all. Just dig into the cars themselves, then invest in the companies that will ship important components to all of those hopeful builders of actual self-driving vehicles. Two of the safest bets on the table today come from the semiconductor industry. Let me show you how NXP Semiconductors (NXPI -0.71%) and NVIDIA (NVDA -7.54%) are betting big on the future of self-driving cars.

Image source: NVIDIA.

NVIDIA: Entertainment and processing muscle

In the just-reported first quarter, NVIDIA's automotive sales passed $100 million in a single quarter for the very first time. This period's $113-million tally was up from $93 million in the previous quarter, and a 47% year-over-year jump.

Automotive chips currently make up the smallest out of NVIDIA's five-reported product categories, but it's a very fast grower. And management is eager to take the company even further into this exciting market.

Earlier this year, the company presented the second generation of its autonomous car development platform, known as NVIDIA DRIVE PX 2. The package combines hard-working Tegra processors with software and connector hardware that lets it read and react to the car's environment. It's a bold attempt to move beyond in-car information and entertainment systems, which make up the lion's share of NVIDIA's automotive sales so far.

Commenting on this product as part of the first-quarter earnings call, NVIDIA CFO Colette Kress explained how large this opportunity can be:

Since we have unveiled DRIVE PX 2 earlier this year, worldwide interest has continued to grow among carmakers, tier 1 suppliers, and others. We are now collaborating with more than 80 companies, using the open architecture of DRIVE PX to develop their own software and driving experiences.
DRIVE PX 2 will serve as the brain behind the new Roborace initiative in the Formula E racing circuit. The circuit will include 10 teams, racing identical cars, all using DRIVE PX 2.

This product ties together everything that NVIDIA does well today, and then drives into brand-new markets, where deep learning and high-powered number crunching can make a difference. And self-driving cars are the obvious next step on the company's chosen path.

Image source: NXP.

NXP: Security, sensors, and more

The Dutch semiconductor veteran is going all in on the automotive opportunity. The company paid $11.8 billion to merge with sector rival Freescale. That deal put two automotive chip leaders together, creating a true giant. Together, they command a 14.2% market share in the $27 billion global market for automotive chips. No other provider crosses the 10.5% mark.

If NVIDIA specializes in infotainment systems and pure number-crunching power, the Freescale-endowed NXP takes a different tack on the market. This company dominates in security systems, environment sensors, and in-car communications. Wherever there's data to be managed -- and modern cars already have a lot of this, before adding self-driving systems -- NXP probably has a finger in that pie already. From the car locks and engine starter to powertrain controls and radar sensors, and even the network components that let NVIDIA's entertainment systems do their magic, NXP is there.

With a sizable head start over the closest competitor, and at the very beginning of exploring synergies between the NXP and Freescale product portfolios, that 14% market share seems destined to grow even larger. Economies of scale make a big difference when you're serving one of the world's largest industries -- and it's happening just as the automakers are pinning down their favorite component providers for the self-driving overhaul.

A plethora of small, but crucial, tools adds up to a very large market opportunity. And those robotized drivers will only need more sensors, tighter data security, and better network designs. NXP will at least compete for all of these bids, and might become the obvious one-stop shop for all of the above.

This is probably the safest bet on self-driving cars that you can make today.

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Stocks Mentioned

NXP Semiconductors N.V. Stock Quote
NXP Semiconductors N.V.
$174.54 (-0.71%) $-1.25
NVIDIA Corporation Stock Quote
NVIDIA Corporation
$158.34 (-7.54%) $-12.90

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