In this piece, we will look at the ten best self-driving technology stocks to buy according to hedge funds.
The autonomous driving industry is, along with machine learning and image processing, one of the earliest adopters of artificial intelligence. While the post-2022 hype surrounding AI has led to the technology catching the general public’s attention, what ChatGPT debuted was a subset of AI called generative artificial intelligence. Other forms of AI, such as machine learning, have been employed for far longer, and as we alluded to above, one form is autonomous driving.
Autonomous driving uses machine learning to compute data gathered through sensors or cameras on a car. The machine learning algorithms are trained using vast amounts of data already gathered. Several firms already have working autonomous driving platforms. These include Elon Musk’s car company, Google Waymo, and GM’s Cruise platform. Yet, even though all of them are autonomous driving platforms, they also represent a key division in the industry.
Before we get to the biggest controversy in the autonomous driving industry, it’s important to first get a sense of the industry’s value. According to research from Mordor Intelligence, as of 2024, the industry is worth a cool $41 billion. By 2029, the firm expects it to touch $144 billion by growing at a compounded annual growth rate (CAGR) of 22.75%. Analysts believe that one of the biggest drivers of the autonomy industry will be autonomous ridesharing. As per McKinsey, 56% of consumers surveyed in 2022 indicated that they would be willing to share self-driving vehicles provided that they did not increase travel time and cut down costs by 20%. The respondents also wanted Level 4 autonomy in their future cars, which indicates that the market for self-driving vehicles exists among consumers.
But what about businesses? After all, the corporate sector only invests in technologies if it’s confident about making a return and generating operating efficiencies. On this front, additional research from McKinsey shows that self-driving vehicle software could post margins of up to 15% while hardware could have margins of 10%. Autonomous vehicle services create margins of 14%, believes the research firm, as it adds that 96% of businesses surveyed “saw strategic partnerships as crucial to autonomous-vehicle development, and more than half (56 percent) thought the relationship between OEMs and end users (such as logistics carriers) is already changing.”
Cycling back to the division in the autonomous driving industry, this has divided the sector between using cameras to gather visual data or using LiDAR sensors instead. On the former front, Elon Musk created quite a bit of turmoil in 2019 when he announced that firms that use LiDAR for autonomous driving were unwise. Musk persisted with his opinion in a later interview given at an Axel Springer event. He explained that:
“We believe just cameras are the way to go. We don’t use LiDAR at all. The entire road network is designed for passive optical, it’s essentially vision. So, in order to make a car drive properly, you have to solve vision. And, at the point at which you solve vision, you really don’t need any other instruments. Like a careful driver, a human driver can drive with an extremely good track record. Unlike a human, the computer does not get tired. It has 360 degree surround cameras. It’s got three cameras pointing forward. So it’s like being able to see with the eyes in the back of the head. So it’s really, vision is the way to go. There’s some value to active optical for wavelength that’s occlusion penetrating. So it can see through fog, or rain, or dust. But it. has to be high resolution. Such that you can rely on, for example radar at roughly four millimeter wavelength. This is good for occlusion penetration. But it needs to have enough resolution to know you braking for a real object and not just a bridge, or a manhole cover, or something like that.”
However, while Musk is convinced that LiDAR isn’t worthwhile for autonomous driving, executives at Google’s Waymo business beg to differ. At a developer event in 2019, Waymo’s Principal Scientist Drago Anguelov commented “You can imagine doing driving just with cameras, but you would need the best camera systems to really handle it. So that’s a very big bet that you can achieve it. And it’s very, very risky, and it’s not necessary.” He added that his firm had better data courtesy of LiDAR which helps it “build the right simulation environments.” CTO Dmitri Dolgov shared that using LiDAR was “all about taking the best of both worlds and combining them in an intelligible way to have the most capable and the safest system that you can have.”
So, while Musk and the autonomous driving industry battle it out, we decided to look at which autonomous driving stocks hedge funds are piling into. The industry hasn’t performed too well in 2024 as a broader automotive and EV slowdown has meant that orders for self-driving equipment providers have slowed down. The slowdown has led to some stocks losing as much as 58% year-to-date, and as you read on, you’ll understand why.
Photo by ThisisEngineering RAEng on Unsplash
Our Methodology
For our list of the best self-driving technology stocks, we ranked the holdings of Global X’s autonomy ETF with significant exposure to autonomous driving by the number of hedge funds that had bought the shares during Q3 2024 and picked out the top stocks. For an alternative list that focuses on the best autonomous driving car companies, please visit 10 Best Autonomous Driving Stocks to Buy.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. NXP Semiconductors N.V. (NASDAQ:NXPI)
Number of Hedge Fund Investors In Q3 2024: 44
NXP Semiconductors N.V. (NASDAQ:NXPI) is a semiconductor manufacturing company with wide exposure to the automotive industry. The firm provides hardware for autonomous diving systems, and some of its products include processors and radar transceivers used in ADAS systems. NXP Semiconductors N.V. (NASDAQ:NXPI) benefits from the fact that the semiconductor industry has some of the highest barriers to entry in the world. Therefore, the firm enjoys a sizable moat even during tumultuous times such as 2024 which has seen its shares lose 1.9% year-to-date. However, the fact that NXP Semiconductors N.V. (NASDAQ:NXPI) relies on nearly 57% of its sales from the automotive industry means that the firm has to wait for a recovery in its key market before its shares can see positive catalysts.
During the Q3 2024 earnings call, NXP Semiconductors N.V. (NASDAQ:NXPI)’s shared key details about inventory management which is key to the firm’s future:
“Indeed, we were taken by some surprise, I would say, in the — say, in the August time frame during quarter three by a broadening weakness in the Industrial and IoT market pretty much across the board, which led to a much more cautious stance on their side, Ross, relative to also their inventory positions. And the same is now broadening when you ask for the guidance for Q4, it’s clearly broadening into the automotive segment. There I would exclude China from these discussions. I think you’ve heard similar from our peers. China actually appears to be quite strong. Our growth was led by China in quarter three and the sequential growth. And also in quarter four, China actually will grow from a sequential perspective over quarter three across automotive and Industrial and IoT.
But that weakness and that customer behavior you were asking for is really specifically strong now in the fourth quarter in the Western Automotive and Industrial segments. Their customers, and you saw all the profit warnings from the car OEMs, for example, where now the Tier 1s are aiming to further reduce their inventory. So our trends to under ship against natural end demand is becoming even tougher, Ross. That’s how I would characterize the customer behavior. It almost felt like everybody from them kept up their forecast and then suddenly, August, September, they started to drop. And that is now ripping through to the Tier 1s, which are becoming even more cautious on what they want to hold from NXP in terms of inventory. You know that we have talked about this extended inventory digestion before, but that has now extended because of the end market weakness.”
9. Coherent, Inc. (NASDAQ:COHR)
Number of Hedge Fund Investors In Q3 2024: 51
Coherent, Inc. (NASDAQ:COHR) is a laser optics manufacturer headquartered in Pennsylvania. Its products provide the firm with direct exposure to the autonomous driving industry since LiDAR and other sensors rely on laser optics to function. Coherent, Inc. (NASDAQ:COHR) is one of the top-performing stocks on Wall Street in 2024 as its shares are up by 149% year-to-date. The optimism is driven primarily because of the firm’s exposure to the data center industry. AI expansion benefits from data center growth, and firms like Coherent, Inc. (NASDAQ:COHR) cash in on their ability to provide networking and optical communications products for these facilities. One of the firm’s most important products is its VCSEL-based modules that are used in LiDAR systems. Continued strength in the data center market and a recovery in the automotive market are key to driving its share price.
Coherent, Inc. (NASDAQ:COHR)’s management commented on how weak automotive demand affected its revenue in the latest quarter during the Q1 2025 earnings call:
“First quarter revenue was 1.35 billion, an increase of approximately 3% sequentially and 28% year-over-year. From a segment perspective, networking revenue increased 12% sequentially and 61% year-over-year due to AI data center demand. Laser segment revenue decreased 2% sequentially and increased 4% year-over-year, reflecting relatively stable end market demand. Material segment revenue decreased 15% sequentially and 3% year-over-year, primarily due to weak automotive end market demand. Our first quarter non-GAAP gross margin was 37.7%, an increase of 49 basis points compared to the prior quarter, and an increase of 293 basis points compared to the year-ago quarter. The improvements in gross margin were driven by higher revenue volume, favorable mix, and yield improvements.”
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