With the internal combustion engine no longer the sole option for power, the vehicle is being completely reimagined. Dozens of electric vehicle maker start-ups have appeared to capitalize on this coming sea change. But a slew of new auto parts manufacturers and service providers are also appearing to help meet the need for automotive technology, and many of them could be even more profitable investments than the automakers themselves.
Two small auto tech companies that investors should keep an eye on are Luminar Technologies (NASDAQ:LAZR) and Ambarella (NASDAQ:AMBA). In addition, tech giant Qualcomm (NASDAQ:QCOM) has been quietly building its presence in the automotive space, and looks like a great buy right now.
Image source: Getty Images.
Luminar Technologies: Crawling toward a viable vehicle autonomy business
Lidar technology specialist Luminar was off to the races following its IPO in late 2020, but the stock spent much of 2021 in steady decline as investors' excessive early optimism gradually wore off. Lidar (which stands for "light detection and ranging") uses lasers to help a vehicle "see" what's around it, and could feature prominently in the systems that eventually allow for fully self-driving cars. But for now, Luminar is a start-up that's working hard to develop its wares and secure deals with auto suppliers.
The financials tell the story right now. In the third quarter of 2021, Luminar's revenue was a mere $8 million, and it booked an adjusted net loss of $36 million. On its balance sheet, the company had $129 million in cash and another $416 million in short-term investments, so it has a few years' worth of liquidity to cover its losses as it attempts to develop into a viable business. But at this stage, valued at a market cap of $5.8 billion, Luminar is a high-risk investment.
So why keep tabs on Luminar? While I'm personally not ready to buy the stock yet, the company is making fast progress as automakers start to incorporate lidar technology into their advanced driver assist systems (ADAS). Revenue last quarter was up 89% year over year. And it was recently announced that Nvidia (NASDAQ:NVDA) had selected Luminar's lidar sensors to go into the Nvidia DRIVE Hyperion autonomous vehicle platform, an integrated computer and sensor suite that automakers can use to supply their vehicles with self-driving features. DRIVE Hyperion will go into production for 2024 model year cars.
Thus, Luminar is on a clear path to becoming a viable auto supplier business over the next couple of years. Investors will need to exercise some patience here, as a lot of hype is still priced into the stock. Nevertheless, this small business holds a lot of promise if it can continue to advance its lidar technology.
Ambarella: Computer vision is already in the works
Computer vision is an entirely different type of technology that is helping enable autonomous vehicles. It uses digital cameras to capture video, which is processed by high-end system-on-a-chip hardware and artificial intelligence software to allow vehicles to safely navigate the roads. Ambarella specializes in the design of these image processing chips.
Computer vision is already in use in some ADAS platforms -- including Tesla's (NASDAQ:TSLA) self-driving system -- as well as in other devices like security cameras. But Ambarella is still early in the process of developing hardware for the more advanced systems that will unlock progressively more autonomous cars -- and eventually, ones that require no human input. Still, its financial results are already benefiting. Through the first nine months of 2021, revenue was up 50% year over year to $242 million.
As more automakers put Ambarella's technology to use in the coming years, its currently small sales base could expand dramatically. (Top semiconductor companies book billions of dollars in annual revenues.) That upbeat thesis is currently priced into the stock. Even after a more than 30% pullback in recent months, Ambarella trades for more than 19 times its trailing-12-month sales and nearly 120 times its adjusted net income. (Most of the company's excess cash is being spent on research and development right now.)
Given the high price tag, I'd tread very lightly with this semiconductor stock at the moment. Nevertheless, Ambarella could be a top player in automotive technology in the decade ahead. It's prone to wild swings in price, so keep this stock on your list of buy-the-dip candidates.
Qualcomm: The next frontier for mobility
Nearly every smartphone on the planet has a piece of Qualcomm-designed electronics in it. Through the 2000s and 2010s, Qualcomm's chips contributed to the boom in computing mobility from smartphones and telecom services. In recent years, the industry has matured, and this semiconductor stock has become more of a value play.
But Qualcomm has been steadily gearing up for the next wave of mobile computing, and it has the modern car squarely in its sights. In fact, during its fiscal 2021, which ended Sept. 26, Qualcomm reported $975 million in sales to the auto industry. For perspective, that was only about 3% of the company's total revenue. However, it was a 51% year-over-year increase, and with new cars getting enabled with everything from ADAS features to mobile network connectivity, Qualcomm thinks that great things could be in store for it in this segment.
To that end, Qualcomm recently reached an agreement to acquire the automotive software segment of auto technology supplier Veoneer (NYSE:VNE), presumably in a bid to make its mobile hardware easier to implement. And at CES 2022 this month, Qualcomm discussed its current capabilities and future plans for the "software-defined vehicle" -- features that span continuous connectivity and monitoring, ADAS processors, in-cabin infotainment, and a cloud platform that will make updates of vehicles' software easier.
Qualcomm already boasts a top ecosystem for smartphone manufacturers, and its expansion into the automotive world is well underway. The company expects to grow at a healthy pace, and anticipates that its total addressable market will grow at an average percentage rate in the low teens over the next few years. Trading at 24.5 times trailing-12-month free cash flow as of this writing, Qualcomm looks like a great under-the-radar way to invest in the ongoing advancement of automotive technology.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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