Is Aptiv Stock A Buy?

Aptiv PLC (NYSE:APTV) is a manufacturer and distributor of vehicle electronics, components, and modules. This means it’s directly involved in both the hardware and software related to all the “fancy” new navigation systems, automated driving, infotainment, and more.

Its products are impressive and at the root of the automotive revolution, which makes investors wonder is Aptiv stock a Buy?

APTV share price quadrupled over the last decade before dropping to a low of $29.22 when the world turned upside down. It slowly recovered throughout the year as automakers continued the push to keep manufacturing open for 2021 sales.

By Thanksgiving, the price surged on the announcement of its $4 billion partnership with Hyundai for a driverless vehicle being approved for testing in Nevada. This pits the joint self-driving venture against companies like Apple (AAPL), Google (GOOG), and Uber (UBER), along with global car manufacturers.

Let’s navigate through Auto 2.0 to determine how the car industry will recover from the pandemic. Then we’ll check our rearview and gauges to determine if Aptiv will accelerate or pump the brakes in the 2020s.

Aptiv Targets A Rapidly Growing Market

Data is at the core of the Internet of Things (IoT), artificial intelligence (AI), and automation. It’s all part of the so-called Fourth Industrial Revolution and is in a phase where cities and vehicles are being automated like industrial equipment. It’s called Auto 2.0.

Aptiv is one of many companies at the forefront of the Auto 2.0 movement. It deals in critical electronics components, like the sensors, connectors, computers, and other electronics used to turn your car into a mobile hotspot. It’s a market that analysts expect to grow by $609.76 million by the end of 2020.

And that’s just one part of the company’s business model – its Hyundai autonomous vehicle partnership is focused on R&D for a future that’ll come sooner than later.

It started with partially automated safety features that enhanced anti-lock braking, and adaptive cruise control among other improvements. The U.S. Department of Transportation estimates that by 2025, fully automated vehicles will be commonplace on our roads and highways.

Of course, the road’s not completely clear ahead. A 2018 fatality in Tempe, Arizona stalled Uber’s autonomous driving tests. And Tesla vehicles with Autopilot engaged have been blamed in numerous car crashes around the country.

Autonomous vehicle technology is a big gamble, but the infotainment sector is continuing to grow. Both could pay off substantially for investors, even with the year-end price spike.

Is Aptiv Stock A Buy?

When Aptiv share price recovered, its market capitalization soared to over $30 billion. Even at that so-called lofty valuation, the company had a healthy 18x P/E ratio, suggesting it may be fully valued but is not necessarily overvalued.

The company started paying dividends to shareholders in December 2017 and continued quarterly payments of $0.22 until the pandemic.

The announcement of a COVID-19 vaccine gave investors reason to believe the economy will reopen in 2021, and the Hyundai Nevada driverless test will be a big win for Aptiv.

If it passes, of course.

Risks of Buying Aptiv Stock

Although many are bullish on Auto 2.0 bets like Tesla (NASDAQ:TSLA), Uber (NYSE:UBER), and Aptiv (APTV), bearish investors will tell you all three of these companies are overvalued in 2020.

One has lower sales volume than its competition, the other can’t get profitable, and the third is as-yet unproven.

The company has over a $30 billion market capitalization while reporting net income of $283 million for the third quarter. In fact, year-to-date revenue reported for Q3 showed an 18 percent revenue decrease for the year. This could be due to the slowing of the economy or it could point to bigger problems.

U.S. car sales were down every quarter in 2020, with about a 20 percent total market shrinkage by year end. This points to a lower demand as people hold onto cars longer to save money during tough economic times. It could be an issue for the company’s offerings.

Aptiv also won’t receive too much benefit from the driverless car trend for another five years. That gives it great mid-term and long-term potential, but it could easy underperform the general market in the meantime unless it identified another growth driver.

Of course, it’s not easy to expand in a recession, which we appear increasingly likely to face between now and then. This could bottleneck Aptiv’s growth potential, much less the heavy competition it faces in the market.

Can Aptiv Competitors Win?

Aptiv is just one player in a large vehicle electronics market. Rivals include Hyundai, Valeo, Denso, Harman, Marelli, and TE Connectivity.

Each of these players is working to gain high-value contracts with electronics manufacturers like Sony, Alpine, and Kenwood, along with tech companies like Apple (AAPL), Google (GOOG), and Amazon (AMZN), to supply the next generation of vehicles.

The company’s sales force needs to negotiate tough contracts in a shrinking market and could find its overhead costs and profitability temporarily throttled. This could allow a bigger company to overtake it.

Optionality exists in another form; it has a potential exit strategy available by seeking a buyout from a larger firm. Sony (SNE) or Amazon (AMZN), for example, could greatly benefit from extending their vehicle reach through Aptiv. It could also attract vehicle manufacturers like Hyundai.

Is Aptiv Stock A Buy? The Bottom Line

Aptiv is a mobile manufacturer of electronics, modules, and components used in today’s advanced vehicle systems. From comprehensive infotainment to crucial onboard sensors to automation, it has revenue streams proving successful across the board of Auto 2.0 innovations.

On top of this, its partnership with Hyundai has the green light to test driverless cars in the state of Nevada. This, coupled with positive news signaling a reopening economy next year, sparked a bull run that accelerated the company’s market cap growth.

If it can navigate through the rocky roads of the next five years, long-term investors could be pleasantly surprised with the results at the other side of the finish line.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.