Dozens of new models of electric vehicles will be arriving in showrooms over the next few years. With millions of these vehicles sold around the world every year, it’s no wonder that many startups in the industry have recently gone public to try and capitalize on this huge opportunity. However, the harsh reality is that few of these new EV automakers will be profitable for shareholders.
Suppliers are another story, however. Chips and associated circuitry swallow up more of the inputs needed to produce a modern vehicle. Three of those suppliers that look like buying by 2022 are NXP semiconductors (NASDAQ: NXPI), Micronic Technology (NASDAQ: MU), and Texas instruments (NASDAQ: TXN).
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NXP: highly focused on providing automotive technologies
Chips are a staple of everything tech-savvy, and they have proliferated in all sectors of the economy. As a result, most semiconductor companies are very diverse in the end markets they serve. But NXP is a hidden gem: just over half of its sales went to the auto industry this year, making it a top stock to consider if you want to play the age-old growth trend of electric vehicles without buy shares in electric start-ups.
NXP has a large portfolio of solutions available to automotive manufacturers. From actual battery and powertrain parts management to infotainment to advanced driver assistance equipment (ADAS), this company has it all. This is important, because as automakers embrace all-new battery-powered transmissions, there is a chance to start improving the game in other related areas of technology as well. So when NXP makes a deal for part of a vehicle, it also has the opportunity to sell its portfolio on other fronts.
All of this translates into highly efficient hardware design and chip making operation. Namely, in the third quarter, NXP’s revenue jumped 26% year-on-year to $ 2.86 billion, but adjusted operating profit grew at an even faster rate of 64% for reach $ 959 million. This leaves plenty of room for NXP to continue spending on research and development, as well as investing in future supply needs, as cars are currently gobbling up silicon at an all-time high.
Regarding the current tightening of the supply chain, even though global vehicle sales are stable in 2022 due to limited inventory, NXP may continue to grow at double-digit pace thanks to the increasing amount of technology that enters each new model year. With this trend set to continue throughout the decade (some estimates indicate that technology accounts for 50% of the cost of producing a car by 2030), NXP will play a leading role in the electric vehicle movement. . Trading at just 25 times free cash flow over 12 months, the stock appears to be worth a reasonable amount heading into the new year.
Micron: digital memory in high demand
The digital memory chip company Micron has had a tenuous relationship with its shareholders throughout its history. Memory chips – a commodity and a key ingredient in semiconductor designs and more advanced computer systems – are one of the most cyclical segments of the semiconductor industry. Even small changes in supply and demand affect prices, which can push Micron’s profits up or down.
2021 got off to a very quick start as the global chip shortage is currently priced at the top of the line, putting Micron’s sales and profitability on track for a possible new record high. But after the stock hit its last record at the start of the year, concern grows about the possibility of an upcoming cyclical downturn in digital memory. Micron has just brought down this notion, potentially pushing it back until 2023.
In the company’s latest earnings call, management said the company is well-stocked to meet demand over the coming year, keeping Micron on track to achieve record sales figures over the next year. Fiscal 2022. As a result, profitability is up (adjusted earnings per share increased 177% in the first quarter of fiscal 2022, and they are expected to double again in the second quarter). For now, at least, Micron stock appears to be an underrated buy as Wall Street reassesses the company’s lucrative outlook for next year.
But what does this have to do with electric vehicles? Memory is a key ingredient in battery and transmission technology, as well as infotainment, connectivity, and other essential functions of today’s modern car. Coupled with other growth engines such as cloud computing and AI (which also contribute to the development of advanced vehicle functionality), Micron is one of the top automotive technology providers to watch right now.
Texas Instruments: an industry barometer ready for steady growth
If Micron represents one of the most volatile stocks in the chip world, Texas Instruments is the opposite. The former technologist is a slow, stable designer of digital and analog equipment for the industrial sector, and a very efficient manufacturing company to start with.
TI produces all kinds of hardware needed for computer and electronic systems. The company does not provide an exact breakdown of sales, but the automotive industry is one of the main buyers. TI supplies components for electric vehicles and hybrid cars in areas such as battery management, charging, transmission and power steering parts. Together with its digital chips, these analog parts (chips that interact with real-world inputs) make TI a great way to take advantage of advancing vehicle technology.
Of course, as a former holder of the industry, this is not a high growth stock, but what TI lacks in a full expansion, more than makes up for the profit gains and the return excess liquidity to shareholders through dividends and share buybacks. This has been a consistent winner in the market for the past decade. The stock has posted an impressive 714% total return over the past 10 years, double the total return of the S&P 500.
With automotive and industrial technology in high gear right now, TI looks like a fantastic buy for 2022 and beyond, trading 25 times over 12 months of free cash flow at the time of writing. As more and more consumers purchase electric vehicles in the years to come, Texas Instruments will find many new markets for its broad portfolio of electronic components.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
