Friday, October 14, 2022
As a boomer “of a certain age,” I fondly remember the 1970s, back when muscle cars ruled the streets.
Gas was dirt cheap, so we could afford to cruise around with souped-up V8 engines, arguing about which car ruled the road.
Back then, it was Ford versus Chevy. Today, it’s Tesla Inc. (TSLA) versus China-based BYD Co. Ltd. (BYDDF).
But as investors, we don’t care who makes the better car. We just need to figure out where the biggest profits are hiding.
And that’s what I’m focused on today…
You see, I’m about to show you a play in the EV market that could soon double its per-share earnings.
To set the stage here, consider the size of China’s new car market…
According to Statista, it’s worth a whopping $473 billion.
That helps explain why it’s turned into a drag race, with Tesla and BYD running neck and neck.
In Q2 of this year, Tesla delivered 254,695 EVs. That’s slightly below the expected 256,000, and down 18% from Q1’s high of 310,048.
For the most part, this result was due to Tesla’s Shanghai factory being under Covid lockdown for most of April.
Full production didn’t resume until June, too late to boost the company’s Q2 numbers.
BYD, meanwhile, produces many of its vehicles in Shenzhen, so it was able to rocket past Tesla and sell 355,021 EVs. That made it the most successful EV company in China for the quarter, and marked a stellar 256% increase from the same quarter the year before.
The upstart certainly won the second-quarter race. But with more lockdowns possibly on the way, and droughts already hampering BYD’s production, there’s no telling which company will remain on top.
Plus, I can tell you from personal experience: never bet against Tesla CEO Elon Musk. And as noted earlier, we don’t have to.
You see, cars today are computers on wheels. And that means they’re brimming with semiconductors.
No wonder the value of the global market for automotive chips is growing 17.3% a year, according to Mordor Intelligence. In 2020, it was worth just $37.4 billion. But just four years from now, it’ll hit $101.3 billion.
This is where Qualcomm Inc. (QCOM) comes into the picture.
Based in San Diego, this chip company is a pioneer in wireless semis. It played a crucial hand in developing the 2G cellphone standard in the 1980s and 90s.
It’s also been vital to developing the technology and chips for each important wireless standard since. Today, it holds several key patents, without which 4G and 5G are impossible to use.
The company’s huge presence in smartphone chipsets, wireless chips, and elsewhere make it the world’s largest “fabless” semiconductor firm. That cements Qualcomm as the largest chip designer on the planet that doesn’t own its own factory.
Being fabless tends to lead to a better focus on designing specialized chips, as well as higher profit margins.
Of course, Qualcomm is always looking for the next big breakout. And in recent years, it’s targeted the auto sector as a new market for growth…
Its entry is already providing it with a huge lift…
It recently said its overall auto chip orders stand at $30 billion through 2026, up from an estimated $19 billion as recently as last July.
The company has adapted its Snapdragon chipset for use in vehicles. It’s making savvy use of its emphasis on speed, connectivity, adaptability, and the huge number of companies that already know how to work with the chipset to bring cars into today’s cloud-connected era.
One major feature that Snapdragon-based EVs will have is the ability to get updated wirelessly, like smartphones.
That’s far more convenient than with other cars, which need to be brought into the dealership for an update — a tedious task that means many cars run on old software.
Qualcomm’s chipset has been so successful that, in China, many EV manufacturers boast that their vehicles run on Snapdragon chips.
For example, Li Auto’s L9 vehicle uses two Snapdragon SA8155P chips to power its “smart cockpit.”
Another Chinese EV brand, Zeekr, just announced that its updated 001 vehicle has been upgraded to a new Snapdragon chip, too.
Xpeng, Nio, and others also rely on Snapdragon chips to power the driver-facing interface, driver-assistance features like lane assist, and more.
Closer to home, Qualcomm has signed deals with Volvo, Honda, and Renault to supply them with chips starting late this year or early next year.
These chips will enable handsfree-use of digital assistants, handsfree-use of Google Maps for navigation, and many other features.
As you can see, Qualcomm is smack in the middle of the rapidly growing market for vehicle chips.
And don’t worry about the chip shortage: Qualcomm has invested in digitalizing its operations so it can respond to shocks more quickly.
Furthermore, the company’s fundamentals look good. Qualcomm is a well-run firm with high earnings.
Over the past three years, for example, its sales growth has averaged 22%. But in a sign of great efficiencies, earnings per share growth came in three times higher.
Even if we cut the forecast for its earnings growth in half, it could still double its earnings in just over three years.
So, with this single long-term play, not only can you get access to the growth of Volvo, Honda, and Renault…
But you can ride along with every major brand in the soaring EV market.
Cheers and Good Investing,
Chief Investment Officer
Trend Trader Daily