Rising Chip Content in Cars a Main Theme at CES

We attended CES 2018 in Las Vegas last week and met with several of the analog and mixed-signal chipmakers we cover, as well as some Tier 1 automotive-parts suppliers.

The emphasis on rising semiconductor content per vehicle continues to be a primary theme, and we see no signs of this secular trend slowing. We were most impressed by the progress of light detection and ranging technology, or lidar, with carmakers aiming to implement several lidar-based sensors in each vehicle.

We continue to view the automotive sector as the most attractive revenue growth driver for many of the semiconductor companies we cover. We are maintaining our economic moat ratings and fair value estimates for the companies we met with at the event, including

We view the group overall as fairly valued to overvalued. Microchip remains our best pick of the four, as it trades at a slight discount to our fair value estimate and we suspect that it has room for further operating leverage and efficiencies associated with its recent acquisitions.

Of the many demonstrations of semiconductor-related advancements we saw, German automotive technology company Continental’s “key as a service” might be an easy example of these favorable trends. By using near-field communication and other biometrics, car owners can automatically lock and unlock doors as they approach the vehicle or use their smartphones. With the appropriate backup plans in place, the traditional handle and mechanical key might be replaced altogether. Continental believes that such a hands-free solution might be appropriate for ride-sharing vehicles and car rentals. Solutions like these provide the chipmakers we cover with analog, microcontroller, sensor, and connectivity chip content opportunities that were not possible just a few years ago.

Although many observers may have their eyes on the fully autonomous electric vehicle, the path to that future will be paved with incremental additions, such as key as a service. We remain optimistic about revenue growth for the chipmakers we cover because we are not waiting for a step-function rise in content for the car of the future, but rather a steady climb of new opportunities over the next decade or more.

In autos, we were most impressed by the progress that parts makers have made on the lidar front. Startups such as Velodyne, Quanergy, and LeddarTech were larger participants at the event this year, touting their progress in reducing the cost of lidar systems used today (tens of thousands of dollars) to smaller, more stable, less expensive sensors. Among the large players, Continental’s demo of its solid-state lidar sensors (due to ship in 2020 vehicles) was quite impressive and might be tough for any upstart to beat. Whichever lidar maker wins out in the market, all of these sensors will require additional chip content within the sensors themselves and also in sensor fusion as the lidar data is passed back into the computers handling the steering and braking mechanisms of the car, if not larger automotive platforms like those announced by Nvidia or Intel.

At ADI’s investor presentation, the company again emphasized its chances of gaining traction in high-end radar, in part from its prior acquisition of Hittite and its expertise in high frequencies. For Level 3 to Level 5 driving (that is, the path toward fully autonomous vehicles), ADI thinks it might be able to sell as many as 10 of its sensors per vehicle, again driving significantly higher chip content per vehicle than in years past, when the company’s focus was parts used in the vehicle body and airbags. Also, thanks to the Linear Technology acquisition, we saw ADI’s presentation of its wireless battery management system technology. ADI said the wires used in wired battery management systems today are subject to damage by extreme temperatures and vibrations. Although the auto industry has not relied on wireless transmissions in the past, ADI thinks its offering can reduce the total cost of these systems to its automotive customers by removing the wires and potentially reducing battery maintenance and monitoring costs.

At STMicro’s presentation, the company touted its silicon carbide, or SiC, power semiconductors, targeted for electric vehicle charging. Continental showed off its inductive charging capabilities at CES, targeting a 2020 launch date, where it builds onboard chargers for the vehicle and also ground pads from which the vehicle can charge. STMicro thinks it will earn several hundreds of millions of dollars per year from SiC, and it began shipping its products in the third quarter of 2017 as an early participant in this opportunity. Continental noted that the use of SiC-based power products might be appropriate for ground pads, which would not use any coolant fluid to reduce the heat emitted from the charging pad. Onboard chargers may still use coolant to reduce the temperature in the car, but SiC might also be a solution for carmakers that want to eliminate the use of coolant. Infineon also appears to be well positioned in future SiC power semiconductor content.

We model average automotive revenue growth of 5.5% for ADI, 8% for Infineon, and 5.5% for STMicro, respectively, over our explicit forecast periods of four to five years. (Microchip does not normally disclose revenue by end market, although it gave its first disclosure in fiscal 2017.) On the basis of the ongoing increase in chip content per vehicle demonstrated at CES and elsewhere, we remain confident in these growth rates even if global light-vehicle production grows around 2% per year, as forecast by our automotive equity analysts.