(Veteran tech columnist Jon D. Markman publishes Strategic Advantage, a lively guide to investing in the digital transformation of business and society. Click here for a trial.)
Elon Musk says Tesla ( (TSLA) - Get Report) doesn’t want to build a walled garden around its cutting edge technology. That’s great news for silicon companies like Monolithic Power Systems ( (MPWR) - Get Report).
The Tesla chieftain said Wednesday the company has been in preliminary talks about licensing its full self-driving technology. A gold rush for advanced driver assistance systems equipment is near.
Monolithic makes the integrated circuits that power those ADAS components.
It’s not the first time Musk has pledged to help move the automotive sector forward. In a letter to shareholders way back in 2006, he talked about getting the industry to embrace electrification. His plan involved a low production sports car, a more mainstream luxury vehicle, followed by a mass market people mover. Although the Model 3, Tesla’s least expensive vehicle, is nearing sales of 500,000 units annually, it is debatable if the $50,000 sedan is mass market.
Where Musk has achieved great success is industry leadership. The fun to drive, forward looking Tesla brand has moved automakers to electrification and the quest for autonomy far faster than anyone would have predicted a decade ago. All of the major carmakers are have plans to produce electric vehicles. General Motors ( (GM) - Get Report), Volkswagen and Volvo plan to transition their entire fleets to EVs.
The added benefit of weaning the sector from the internal combustion engine is a reimagining of the future of transportation. Spurred on by Musk, automotive leaders are pressing full steam ahead with advanced safety systems that will autosteer, brake and use more sensors to avoid collisions.
These new systems involve a multitude of front and rear facing cameras, driver monitoring modules, radars and other assorted sensors.
Tesla vehicles integrate all of these systems with Autopilot, its best-in-class software package.
Autopilot is light years ahead of the competition due largely to the nature of Tesla vehicles. They are always on, always connected to the network. Every day several hundred thousand Tesla owners use the software in real world situations. All of the data created is whisked back to Tesla servers to be analyzed using artificial intelligence.
During a conference call with analysts Wednesday, Musk noted there is still a lot of work to do to achieve full self-driving. Tesla engineers need to train their AI systems to process surround-view camera footage simultaneously. Currently the software uses only single cameras and single frames.
At the Tesla Autonomy Day last year Musk hinted this training is underway using a new supercomputer application called Dojo. Wednesday he said Dojo might become part of a package licensed to other car companies.
Before any of this can happen Tesla has to work out the bugs. The rest of the industry also has to bulk up in terms of the camera, radar and sensor systems required to gather the data Dojo needs to function. This should create a gold rush for the firms that make the pics and axes, so to speak.
Monolithic designs the tiny integrated circuits needed to make the power systems more efficient. While this seems may seem trite, as cars and trucks become EVs with more electric parts, every efficiency is a blessing.
Modern cars already have an average of $350 worth of semiconductor content according to Monolithic managers. Car and truck buyers now expect Spotify ( (SPOT) - Get Report) functionality on their infotainment systems, safer LED lighting, ports to charge their iPhones, and state-of-art heating and cooling systems. All of these systems use sophisticated ICs. However, the arrival of next generation ADAS and self-driving cars is the motherlode for firms like Monolithic.
The Kirkland, Wash.-based company is currently working with every major auto parts supplier in the world. Through Delphi, Bosch, Panasonic Automotive, Magna ( (MGA) - Get Report) and Mitsubishi Electric, the company reaches end customers such as Ford, Nissan, BMW, Mercedes, GM, Volvo, Toyota, and Volkswagen.
Monolithic shares trade at 64x forward earnings and 21x sales. These metrics may seem extreme yet given the size of the opportunity investors are wise to pay the premium. Sales have been growing sales at a steady high teens clip for the past 7 years.
The company is set to report full year financial results Feb 4. This pullback looks like a buying opportunity.