The Software Secret Powering Electric Vehicles

Electric vehicles are going to catch on with consumers. It’s only a matter of time, according to the president of the nation’s biggest automaker.

General Motors (GM) announced Monday that the automaker is will commit $2.2 to its Detroit-Hamtramck plant to begin producing EVs as early as 2021. It will be the second Michigan plant making plug-ins.

Electrification is coming. And yet, investors are mostly asleep at the wheel.

Their skepticism stems from the Tesla (TSLA) story. Despite a high-flying stock price and a celebrity chief executive, Tesla is still mostly making losses because it is spending heavily while making too few cars.

Related post: Branding: Tesla’s Ultimate Power Move

Building new plants and a nationwide charging network is hard and expensive work. It also turns a bright light on the fact that the Silicon Valley upstart remains a production pipsqueak.

Through December 2019, Tesla manufactured only 365,300 vehicles, according to Statista, an online data analytics firm. That figure looks insignificant compared to overall domestic production of 17,047,725.

Regardless, General Motors and the rest of Detroit and Bavaria are charging hard into EVs. High-end EVs from Audi and Porsche will be here next year. This is a sign for investors to start waking up.

GM showed off the Cruise Origin only a week ago. This fully autonomous six-seater is being billed as a small urban people mover. The electric power plant, and the rest of its futuristic parts, will ultimately be built at the Hamtramck plant.

Related post: Why Ford’s New Electric Mustang is Great for Chip-makers

The Wall Street Journal reported earlier this month that GM plans to enter the high-end EV market with a throwback from the glory days of fossil fuels. A smaller Hummer design will ditch its gas-guzzling ways for an electric skateboard drivetrain. That modular platform will be used for new electric SUVs and pickup trucks, too.

That type of versality will be key to the early success of GM’s electric ambitions. So far, the marketplace for EVs is miniscule. Established automakers will need to prove they can compete with Tesla, while finding a way to make the economics work. That means multiple vehicles rising out of similar platforms.

But you shouldn’t chase this car maker, or that one. After all, the tech behind them will be the same. So, instead of risky bets on GM or Tesla, I have a different approach …

The best way to play this trend is Aptiv PLC (APTV). The Irish firm builds greener, safer and more connected software solutions for the next generation of automobiles.

Related post: Sony and Microsoft Are Driving the Future of Cars

During a presentation at the J.P. Morgan Tech/Auto Forum, Glen De Vos, chief technology officer, noted that many automakers are pushing forward with autonomous vehicle projects with the expectation that limited-scope driverless cars will be active in 2020. Scale deployment is expected in 2025.

De Vos says automakers know that the only way to get there is with a new, fully digital platform based on electrification.

Vehicle makers intend to launch 45 new high-voltage platforms by 2022, spanning hundreds of vehicles and 13% of global vehicle production. Aptiv has booked $4.5 billion in new orders since 2016. However, high-voltage electrification system sales are expected to climb to $1 billion annually by 2022, a 40% compound growth rate.

During 2019, Aptiv won contracts for the Tesla Model Y and Model 3, launching in China. The company also won the contract to supply the low-voltage battery system for the Fiat 500 BEV.

Shares trade at 16.4x forward earnings and 1.5x sales, for a market capitalization of $22.7 billion. Given the potential size of the vehicle electrification market, these metrics look inexpensive.

Aptiv Shares recently traded at $85.00, but I’m still looking for a new entry level. Investors should keep watch for weaknesses.

Best wishes,

Jon D. Markman

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