Semiconductor and software innovation will play a big part in the auto industry’s transformation to electrification and autonomy over the next decade, according to TD Cowen. That’s because the vehicle platform redesigns need to come through semiconductor innovations in processing and power-management technologies, analyst Joshua Buchalter wrote in a report on Monday. “Incremental value in the auto industry will be captured by solving core technology problems. We anticipate technology companies to play an increased role in vehicle design … and capture more of the incremental value being created in the mobility industry,” he said. “We believe these powerful secular content themes are underappreciated amidst appropriate cyclical concerns and pushback on EV attach rate projections,” he added. In fact, companies indexed to these trends can outgrow the broader market and should be on investors’ radar today, Buchalter said. TD Cowen’s proprietary model forecasts the total automotive semis market growing at a 9% compound annual growth rate from 2023 to 2030 — doubling to about $121 billion. The firm forecasts power semiconductors, processing and sensors will grow at 16%, 14% and 20% CAGRs, respectively. Silicon carbide, silicon insulated-gate bipolar transistors (IGBTs) and dedicated advanced driver assistance systems (ADAS) processors are the most attractive underlying verticals, Buchalter said. With that in mind, the firm came up with a list of the top stocks to own on the “new vehicle of tomorrow.” Here are some of those names. Allegro Microsystems is tied to both electrification and autonomy and has one of the most attractive growth stories in the space, Buchalter said. “Allegro’s magnetic sensors are increasingly utilized to accurately sense current (Allegro boasts < 1% error rates), a critical problem in xEVs as power is dissipated from a centralized battery throughout the vehicle," he wrote. The company also has a long history of supplying the auto industry and a comprehensive customer list. While Allegro's shares trade at a premium, the combination of profitable growth tied to EVs and autonomous vehicles is difficult to find in the small- and mid-cap range, Bachalter added. He expects positive estimate revisions over time. Meanwhile, Mobileye has a first-mover advantage in the ADAS market, thanks to its extensive experience designing purpose-built computer vision system-on-chips and its access to decades of real-world driving data, Buchalter said. A system-on-chip, or SOC, is an integrated chip that contains multiple computing components. He sees sustained growth of at least 25%, supported by Mobileye's leadership in ADAS and its expansion into higher levels of autonomy. "Combination of 25%+ growth and > 30% operating margin profile warrants a premium,” he said. Artificial intelligence darling Nvidia , whose shares have already more than doubled this year, is another beneficiary of the move to autonomous and electric vehicles, according to TD Cowen. Nvidia has multi-core parallel processing naturally suited for AI-based computing, a broad set of DRIVE software stacks, datacenter solutions for the auto manufacturers that “create a moat of simulated driving miles and AI services for partners” and its leading Tier-1 and auto partnership ecosystem, analyst Matthew Ramsay wrote. Lastly, while Qualcomm stock is still likely to trade on developments in its smartphone business, autos are “quickly becoming a more meaningful part of the story,” Ramsay said. The company has already amassed a $30 billion auto revenue pipeline, spread across the digital cockpit, connectivity and ADAS, he pointed out. “Qualcomm’s investments across its CPU franchise, inference engines, graphics IP, computer vision stack, and the Arriver software acquisition offer unmatched breadth when considering not only compute, but via its RF business connectivity enabling cloud and V2X capabilities,” Ramsay wrote. — CNBC’s Michael Bloom contributed reporting.
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