Mobile operating systems are going mobile, literally. Car companies are killing tethered operating systems in favor of built-in Android. This is what it means for investors.
An executive at General Motors (GM) announced at the end of March week that Android Auto and Apple CarPlay will not be available in upcoming electric vehicles. The replacement is Android Automotive, a standalone OS.
Investors should buy shares of Qualcomm (QCOM) to take advantage.
Auto companies are racing toward electric vehicles. EVs represent a quantum leap in vehicle propulsion, yet that’s not the impetus for the transition. EVs run on purely digital platforms. Executives at GM, Ford (F), Volkswagen (VWAGY) and other firms see an opportunity to dramatically improve the cost structure of how they make and maintain vehicles, and derive future revenues.
To get there, carmakers need a viable digital OS to compete with smartphones.
Android Auto from Alphabet (GOOGL), and Apple’s CarPlay are extremely popular with car buyers. The mobile platforms live on Androids and iPhones, and use device wireless connectivity to provide all of the familiar flourishes of mobile devices. Native map, music, and message apps are seamlessly mirrored to vehicle infotainment screens. Unfortunately for carmakers, the platforms also take complete control of the user experience.
Android Automotive from Google is a standalone, digital OS designed for cars.
Vehicle makers can use its base code for their custom infotainment; heating, ventilation and air conditioning; and ride systems. And Google Automotive Services provides access to a best-in-class digital assistant, infotainment apps like Spotify (SPOT), and Google Maps. Quality, real-time digital maps are vital for EVs to estimate range, or to find the nearest available charger. Android Automotive turns an EV into a capable, location aware digital device.
Unsurprisingly, car companies are lining up to get on board with Android Automotive.
The announcement Friday from GM is the latest in a long line of Android Automotive design wins. Ford, Volkswagen, Honda, Volvo, and others have announced partnerships. Others will undoubtedly follow.
Qualcomm is the obvious winner.
The San Jose Calif-based company designs the semiconductors and wireless modems that make most Android devices functional, and location aware. Qualcomm also has a substantial, long-standing automotive division to build inroads into the sector.
Qualcomm was a featured partner last year at Nio (NIO) Day. The Chinese carmaker revealed its ET7 sedan, an EV that features always-on network connectivity for high bandwidth/low latency 5G, Bluetooth 5.0, Wi-Fi 6 and the full vehicle-to-everything user experience. As vehicles transition from internal combustion engines to electric, they’re going need these connections, and lots of other new gear from Qualcomm.
Its Snapdragon Digital Chassis platform, announced in March, combines 5-G wireless connectivity systems, digital instrument and entertainment clusters, upgradability for over-the-air updates, and driver assistance technologies, all in one unique product.
Nakul Duggal, senior automotive vice president, told Wired that car companies need to think of EVs as a truly digital product. Early digital chassis customers include Sony-Honda Mobility, Mercedes-Benz, GM, Cadillac, and Stellantis NV (STLA). BMW, Hyundai Motor Group, Nio, and Volvo have also expressed interest.
Investors are mostly missing this connectivity big picture.
They are thinking too small, weighing mobile OS winners and losers, or the likelihood that legacy automakers will eventually catch Tesla (TSLA), the EV industry leader. The real investment opportunity is the companies that will supply the equipment needed to even make that race possible.
Qualcomm has a long history of building stronger networks. The strength of these gateways will be critical for legacy auto companies as they attempt to move toward EVs. The first step is securing a strong digital OS to build on.
At a share price of $127.58, Qualcomm trades at 12x forward earnings and 3.3x sales. That’s cheap. The shares are a buy into weakness.
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