As reported by TipRanks, Morgan Stanley recently released a report, in which in which it pointed out major changes in the automotive industry, mainly due to China’s growing production capabilities. The firm mentioned that China is now making 9 million more cars than it sells, which is shaking up competition in the Western market.
Due to this, the bank has downgraded its assessment of the U.S. auto industry from Attractive to In-Line. The change reflects rising vehicle inventories in the U.S., affordability challenges for consumers, and an increase in credit defaults among less-than-prime borrowers.
On a brighter note for car dealerships, the bank upgraded several franchise dealer stocks to Overweight.
The firm believes that worries about franchise dealers have diminished, especially compared to the challenges faced by automakers linked to China and their electric vehicle investments. The perspective shows a shift in attention, as China moves from being a source of demand to one of surplus supply, impacting global automotive trends.
Moreover, in another report by the bank named “The Future of Cars,” the firm discussed that advancements in technology are projected to drive a rise in software-defined vehicles (SDVs), potentially making up 90% of vehicle production by 2029 and dominating the market by 2040.
SDVs will feature improved computing power that allows for remote updates similar to smartphone apps, which could lead to an expected increase in chip spending of approximately $15 billion over the next five to six years.
However, the path to widespread SDV adoption will involve challenges. Manufacturers need to make sure these vehicles are viewed as safe, addressing cybersecurity concerns and redesigning traditional vehicle architectures. By consolidating multiple functions into fewer high-performance processors, automakers can streamline designs and support advancements in automation and self-driving technology.
Long-Term Perspective on EV Industry in the West
Like every other industry in the 21st century, the auto industry is also evolving and the most common topic of discussion is the EV industry. While the industry has grown significantly over the last few years, it has experienced a slowdown recently due to several factors including slow growth of infrastructure and higher prices compared to ICEs.
In a recent interview with CNBC, Christian Kames, managing director of Lazard, addressed concerns from European automakers about declining demand for electric vehicles and potential reductions in electrification plans.
He suggested that these worries might be overstated, as the automotive industry is undergoing a significant transformation, with new technologies often facing initial hype followed by periods of disappointment.
Kames acknowledged the current lack of demand and insufficient charging infrastructure but highlighted that global initiatives are being implemented to improve EV infrastructure and technology investments. He expressed confidence that electrification will ultimately succeed. He suggested that European manufacturers need to keep investing to maintain competitiveness in the long run.
When discussing future leaders in the EV market, Kames recognized the rising competition from Chinese brands but argued that it is too soon to discount Western automakers. He emphasized that all major car companies are aware of the ongoing transformation and are taking action to adapt, which will be crucial in the next few years.
Apart from electrification, autonomous vehicles are the next big thing. According to Precedence Research, the global market for autonomous vehicles was valued at approximately $158.31 billion in 2023 and is expected to reach around $2.75 trillion by 2033. This represents a compound annual growth rate of 33% from 2024 to 2033.
Our Methodology
For this article, we used stock screeners to identify over 70 auto manufacturers along with auto and truck dealership stocks. Next, we narrowed our list to 7 stocks with forward price-to-earnings ratios below 15 and the highest average analyst price target upside, as of October 4. The most undervalued auto stocks are listed in ascending order of their average analyst price target upside. We also added the hedge fund sentiment around each stock which was taken from Insider Monkey’s database of 912 hedge funds as of Q2.
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).
25 Richest Billionaires in Automotive Industry
A luxury car dealership's showroom, representing the automotive industry the company operates in.
Cars.com Inc. (NYSE:CARS) is a U.S.-based automotive classified site and one of the largest companies in its industry. It streamlines car buying and selling with AI-powered tools that cover all stages, from pretail to post-sale. According to the company, it is visited by over 25 million in-market consumers monthly.
The company’s platform includes four key brands. Cars.com focuses on automotive marketplaces and dealer reputation. Dealer Inspire offers retail technology and marketing services. Accu-Trade provides trade-in and appraisal tools. Cars Commerce Media Network delivers exclusive media solutions.
In the second quarter, Cars (NYSE:CARS) achieved 6% revenue growth year-over-year, driven by strong performance in the OEM sector, which rose 28%. Dealer revenue also increased due to a rise in dealership numbers, while adjusted EBITDA grew 10%.
Free cash flow reached $56 million, marking a three-year high. Despite challenges like the CDK system disruption affecting dealer operations and sales momentum, the company focused on supporting dealers and aims to rebuild sales in the third quarter, especially for products like Accu-Trade.
The CDK disruption refers to a ransomware attack on CDK Global that shut down key systems at nearly 15,000 dealerships in North America. It resulted in over $1 billion in losses for car dealerships.
The company is expected to post its Q3 results between October 30 and November 4. In the quarter, it expects revenue of $178 million to $181 million, with a 2% to 4% year-over-year growth. The CDK disruption will impact third-quarter performance, but the company remains focused on growing product adoption and expanding its OEM partnerships. Full-year revenue growth is projected between 4.5% and 5.5%, with an adjusted EBITDA margin of 28% to 30%.
On August 23, TipRanks reported that Barrington analyst Gary Prestopino maintained a Buy rating for Cars (NYSE:CARS) with a $25 price target. His optimistic outlook is based on the company's solid Q2 performance, which showed a 6% revenue increase and a 10.5% rise in adjusted EBITDA, despite challenges from the CDK cyber incident.
The company also reported a record free cash flow and strong dealer customer growth, with revenue from dealer services up 4.2%. Additionally, the AccuTrade product demonstrated strong retention and accuracy, supported by OEM endorsements, which solidified Cars.com’s competitive position and long-term prospects.
With an average price target of 33.76% as of October 4, Cars (NYSE:CARS) tops our list of most undervalued auto stocks to buy according to analysts.
Overall CARS ranks 1st on our list of the most undervalued auto stocks to buy according to analysts. While we acknowledge the potential of CARS as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CARS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
