The growing artificial intelligence (AI) boom has set many tech stocks on the growth path. This AI boom also had a positive impact on automakers. The electric vehicle (EV) giant Tesla’s shares surged 25% in June, while that of automotive components maker Magna International (TSX: MG) surged 14.5%.
Magna stock bottomed out in May
It was the first significant jump for Magna stock after it fell 20% in early February as it announced weak 2022 earnings. At that time, I was bullish on the stock as the first quarter was the end of many automotive headwinds – from chip supply shortages to rising inflation and interest rates weakening demand, and increasing costs. All these headwinds kept Magna stock in the red (down 20%) throughout 2022.
The recovery rally
At that time, Magna’s management said that the growth will likely pick up in the second half of the year, and that’s what is happening. Automotive sales are picking up as the availability of chips enabled automakers to deliver the order backlog. Hence, Magna’s sales surged 11% to US$10.7 billion in the first quarter. It even raised its 2023 outlook
- to US$41 billion in revenue from its previous forecast of US$40.4 billion at the midpoint.
- to US$1.4 billion in net income from US$1.3 billion at the midpoint.
The improved outlook and fundamentals show that Magna is on the path to recovery and could see growth in the long term. But the sudden 14.5% jump in 15 days has made the stock overbought. Despite this jump, the stock is a buy at the current price for long-term investors.
Magna’s long-term outlook
Magna earns a significant portion of its revenue from body exteriors and structures, power and vision. Further, it is enhancing its capabilities in third-party manufacturing and assembly as it looks to be the first to tap the changing landscape of automotive manufacturing. In an interview, Magna’s chief technology officer, Anton Mayer discussed the complete vehicle delivery opportunity Magna is eyeing.
The automotive industry is going through three megatrends:
- Increasing functional complexity with connectivity, powertrain electrification, Advanced Driver Assistance Systems (ADAS), and interlinkage to charging stations and other vehicles.
- Increasing cost pressure, particularly in battery technology.
- Faster product updates in terms of functionality and software.
Do these changing trends remind you of something? Automotive is undergoing the mobile and laptop trend of tech innovation and upgradation. To adapt to this technological pace, the semiconductor industry divided itself into chip designers (focusing on-chip features) and chip manufacturers (focusing on improved and efficient manufacturing).
In the 2020 decade, Taiwan Semiconductor Manufacturing Company (TSMC) tapped the chip manufacturing opportunity by investing in making complex chips efficiently. Today, TSMC caters to all major chipmakers.
The EV trend has initiated the tech shift, which will gather momentum when autonomous vehicles hit the roads. It will open a whole new industry of mobility-as-a-service.
Could Magna be the next TSMC of automotive?
Magna is upgrading its manufacturing and engineering to tackle the above problems of cost, functionality, and faster upgrades. The company is innovating like a tech company, investing in AI and machine learning tools to improve engineering processes.
One of the biggest challenges of autonomous cars is safety. Magna has acquired Veoneer Active Safety for $1.5 billion in cash to tackle the complexities of advanced software, systems, and integration. It is expanding beyond hardware into middleware and software to give its customers a complete vehicle solution. The Veoneer acquisition is expected to add US$3 billion in sales in 2024 and position Magna as a global leader in ADAS.
The ADAS market is expected to grow step by step with increasing autonomy in vehicles through 2030. And Magna aims to become the TSMC of automotive.
Investor insights
The gap between tech and automotive is closing with tech giants like Apple and Alphabet developing their cars. Now is a good time to buy Magna stock while it still trades like an old-fashioned auto stock with a price-to-sales ratio of 0.42 (This ratio tells you how much you pay for every $1 of the company’s sales).
Once the ADAS momentum picks up, Magna stock could grow like a tech stock and give you high growth towards the end of the decade. The stock can give double-digit capital appreciation and a 3.3% annual dividend yield.
