Chip makers: opening our cars and our minds

Jerry Seinfeld and Larry David once concocted an entire episode of Seinfeld based on what was once a common occurrence: forgetting where you left your car in the cavernous local shopping centre car park. In real life, that nightmare scenario is sometimes compounded by the horror of losing one’s car keys, too.  

Whether the tech hardheads had Seinfeld’s predicament in mind or not, they’ve been busy finding a solution to it. In a couple of years’ time, not only will you be able to use your smartphone to find your car straight away, you’ll also rely on it to open the car door too. 

And once on the road, sensor-equipped cars will ensure you stay in the right lane, detect pedestrians and even read traffic signs for you.

They’re just some of the advances Morningstar analysts noticed during their visit earlier this month to the Consumer Electronics Show—innovatively abbreviated this year to “CES 2020”—the annual global tech jamboree in Las Vegas. 

A decade ago, tech innovation centred on mobile phones. These days, the focus has shifted to the automotive sector. If you’ve ever been for a ride in a Tesla (NAS:TSLA), you’ll know they’re basically computers on wheels. Makers of electric cars, particularly the conventional manufacturers—the “original equipment makers”, as they’re known in the business—are using semiconductor technology to make cars safer and more convenient. 

Despite frothy valuations across the sector, companies appear undaunted by US-China trade tensions and other geopolitical factors. They’re still bent on innovation. Sensors, processors, connectivity chips: advances in the nuts and bolts of the semiconductor industry are revolutionising how we use old technology and enabling machines to interact and function by themselves.

And no more forgetting where you left your car: another key innovation is “ultra wideband”—which allows more precise geopositioning. 

Some big themes stand out: artificial intelligence; “internet of things”; 5G wireless networks; and autonomous and electric vehicles.

And while the sector is overvalued there are standouts, say Morningstar analysts Brian Colello and Seth Sherwood. “Intel Corp (NAS:INTC) remains our top pick, but we no longer see attractive margins of safety in most of the sector, as semi stocks have appreciated significantly in the past few months.”

Technology earnings growth for 2020 is estimated at 10.4 per cent, which is expected to contribute 2.0 percentage points to the S&P 500’s expected growth rate of 9.7 per cent, according to Refinitiv’s data, which would make tech the largest contributor.

Here are some of the names to retain: 

Exhibit 1: Morningstar ratings and valuations

Source: Morningstar Premium

Intel: eye on autonomous cars and stronger laptops

Microchip giant Intel remains one of Morningstar’s Best Ideas within the technology sector. The wide-moat chipmaker is fairly valued relative to Morningstar’s US$65 fair value estimate.

Intel used CES 2020 to show the efforts it is making to grow beyond its PC and data centre CPU roots. It showcased initiatives beyond the PC, including artificial intelligence, cars, and 5G.

Intel also spruiked the capabilities of Mobileye, an Israeli company it acquired in 2017 which sells computer vision processors, dubbed EyeQ, into production vehicles.

Mobileye’s system of sensors aims to make cars and people safer through what it calls “advanced driver assistance systems”. This includes automatic lane-keeping assistance, detecting proximity of pedestrians, emergency braking and adaptive cruise control.

At US$15.3 billion, Mobileye was an expensive buy, says Morningstar analyst Abhinav Davuluri, but it is also a high-growth business that has had some big design wins across major carmakers.

“We believe Intel-Mobileye is well-suited to capitalise on the autonomous driving opportunity, given its strategy for scalability and real-time map development,” says Davuluri.

“Ultimately, meaningful penetration into the automotive market would be a net positive for Intel’s moat, based on intangible assets and switching costs.”

Intel also used CES 2020 to present 25 devices under its Project Athena, which boasts greater performance, response time, connectivity, and battery life, Davuluri says.

For Project Athena, Intel collaborates with original equipment makers to optimise features and performance. Each laptop undergoes industrial torture tests to verify a minimum of nine hours of battery life under rigorous use and various functions such as instant resume.

NXP and Continental: opening doors

A key innovation at the CES was keyless car entry, made possible by advances in ultra wideband, which allows more precise geopositioning. Apple used a wideband chip in the iPhone 11, without expanding on its capabilities.

Morningstar’s Colello and Sherwood met with two companies working on this—NXP Semiconductors (NAS:NXPI) and Continental AG (EXT:CON)—and came away impressed, particularly by the idea of using a smartphone to enter cars and eventually buildings. 

“As the driver enters the vehicle, UWB detects this extremely close approximation to the driver's seat and will allow the vehicle to be turned on. 

“NXP and Continental believe that a car might require six UWB sensors: one for each corner and two in the cabin. Even with a price of, say, $20 per sensor, UWB may emerge as a lucrative opportunity for chipmakers like NXP and perhaps even Tier 1 parts makers like Continental”.

Ultra wideband technology will enable car entry and starting with just a smartphone

NXP also demonstrated the use of UWB for door security in buildings. Instead of a traditional badge to be scanned, a user might be able to use his smartphone to unlock doors.

But, despite this and other advances, Colello and Sherwood say NXP is expensive at the moment. They are maintaining our fair value estimate of US$115 per share for NXP and our narrow moat rating. “We see no margin of safety at current prices, though, and suggest investors wait for a pullback before building a position.”

AI: NXP, STMicro, Omron reading our minds

Not only will smartphones be unlocking our cars, machines will be increasingly activating and responding according to the looks on our faces—and even the emotions we’re feeling.

NXP and STMicroelectronics (NYS:STM) used CES 2020 to showcase the AI capabilities in their processors and microcontrollers, while Japanese robotics maker Omron (TKS:6645) rolled out a robot that can not only play table tennis with human users but also detect their emotions and go easy if the human opponent is starting to feel frustrated. 

Colello and Sherwood argue that while it may appear superfluous, emotion detection could find uses in advertising (detecting which ads arouse laughter, anger etc) and medicine (detecting when patients feel pain, distress).

“Appliances might detect anger or frustration and provide immediate customer service or instructions. Other use cases may emerge in the years ahead.”

STMicro set to capitalise on silicon carbide-based semiconductors 

STMicro is a leader in a variety of semiconductor products, including analogue chips, discrete power semiconductors, microcontrollers, and sensors. The narrow-moat company is a key chip supplier to the industrial and automotive industries.

It was undervalued for much of 2019 but has since gained about 50 per cent in the past six months—an example of the frothiness in the tech sector. 

Despite being overvalued, STMicro impressed with demonstrations of its variety AI-related products, especially silicon carbide-based semiconductors in electric vehicles.  

“We continue to view SiC-based power semis as one of the company's most attractive growth opportunities in the years ahead as these devices continue to be deployed in EV inverters and onboard chargers,” say Colello and Sherwood. 

“While STMicro's design win in Tesla's EV inverters is the key revenue driver for SiC power semis today, we think management's target of capturing 30 per cent share of a roughly US$3 billion SiC market by 2025 remains reasonable if not slightly conservative. 

“We see the SiC market reaching US$6.8 billion by 2028, thanks to the early innings of EV adoption worldwide, and we continue to view ST as well positioned to capitalise on the need for SiC-based semis to deliver higher voltages within these advanced EV systems.” 

This article was originally published in Your Money Weekly