Investing in chip stocks driving automotive innovation

Significant technological change in the automotive industry is fueling strong demand for semiconductors, says Fidelity's Adam Benjamin.

• The use of semiconductors to elevate the features used while driving an automobile has been growing for years, and recent technological advances in electrification, autonomous features, safety and security capabilities, as well as display and lighting, have fueled increased global demand for chips, according to Fidelity Portfolio Manager Adam Benjamin.
• "All this innovation is increasingly supporting the concept that autos have become 'smartphones on wheels' and require more semiconductor content to support these technological advancements," explains Benjamin, who manages Fidelity Advisor^® Technology Fund.
• In helming the sector-focused fund, Benjamin believes the value of technology stocks is in large part determined by companies' potential to generate earnings and cash flow, while his investment framework focuses on themes that impact the largest end markets, determining potential winners/losers, and how certain firms that are technology disruptors can impact incumbents.
• Electric vehicles have played a key role in the rising demand for auto-related semiconductors the past few years, and despite the stock market's recent concern about slowing sales of EVs, they are still expected to see roughly 20% annual growth for the next several years, according to Benjamin.
• While this rate of projected EV growth may be lower than prior years and previous investor expectations of about 30% growth, Benjamin believes it's important to factor in the growth opportunities for chip content, given the pace of innovation throughout the entire auto industry — in many cases, $500 for a vehicle with an internal combustion engine and $1,000 to $2,000 for an EV.
• "I project compelling growth for the semiconductor companies that are leading the way in auto vehicle innovation," he says.
• As of March 31, semiconductors were by far the largest portfolio overweight by subindustry, representing about a third of assets.
• The fund counts some leading names here among its top holdings, including NXP Semiconductors, a key supplier of chips for advanced driver-assistance and EV battery-management systems. The company is developing new architecture to simplify auto connectivity and advance the concept of a smartphone on wheels, according to Benjamin.
• He's also remained bullish on onsemi for its leadership in providing silicon-carbide solutions to power EV traction inverters, as well as image sensors for advanced camera-based safety technologies.
• "Both companies are well-positioned to provide key products at the core of the powerful innovation trends that are disrupting and advancing the auto industry," Benjamin says.