Goldman Sachs has a bunch of stock picks to play the latest autos trend

Published Tue, Mar 22 20228:12 PM EDT

Goldman Sachs has named a raft of stocks it thinks will do well as automakers double down on making cars more connected, intelligent, and autonomous. Automotive software has emerged as a "key focus area" for the industry as vehicles become increasingly software-defined, Goldman's analysts, led by Mark Delaney, said on Mar. 17. In response, traditional automakers, also known as original equipment manufacturers (OEMs), are formulating strategies around connected services and software. This will help them expand and differentiate their product offerings, the bank said, while unlocking recurring, high-margin revenue streams. In a separate note on Mar. 18, Goldman analysts led by Allen Chang noted that automakers have ramped up investment in this area and are now targeting over $20 billion in software revenue by 2030. The bank expects the global software market to grow at a compounded rate of 26% into 2030 to reach $105 billion. Autos stock picks One of Goldman's top picks in this space is Tesla . Delaney highlighted the company's "robust and tightly integrated" hardware/software system which he said has served as a model for the industry more broadly. As such, automakers are bolstering their engineering teams and bringing more software capabilities in-house to better manage and monetize their fleets, he said. "We view Tesla as a leader in automotive software, hardware, data collection, and artificial intelligence, which we believe gives the company competitive advantages in terms of product potential and profitability," Chang added. Goldman has a price target of $1,200 on the stock, which closed at around $921 on Mar. 21, representing a potential upside of 30.3%. The bank also likes General Motors , which aims to have 30 million connected vehicles on U.S roads by 2030. The company also expects its subscription model to generate annual revenue of between $20 to $25 billion by 2030, up from just $2 billion in 2021, the bank said. Goldman's price target of $72 on the stock implies a potential upside of 63.6% to the stock's closing price of around $44 on Mar. 21. Software stock picks With software taking on an "increasingly central" role in the autos revolution, Goldman sees software firms benefiting in both the near and long term. "Despite some major OEMs developing fundamental software in-house ... many software applications in the cockpit and ADAS/AV domain still leverage software companies' specialties and technologies," Chang said. ADAS/AV refers to advanced driver assistance systems and autonomous vehicles. The bank's top picks in this space include two Chinese companies — Thunder Software and Shenzhen Desay Battery — along with German chip maker Infineon . Goldman sees these stocks as "early beneficiaries" with both near-term and long-term growth drivers due to their exposure to "smart cockpit" and ADAS. The bank likes Thunder Software for its extensive automotive product line and the growth of its automotive client base. Goldman has a price target of 162 Chinese yuan ($25.50) on the stock, which closed at around 108 Chinese yuan on Mar. 21, representing a potential upside of 50%. The bank also likes Shenzhen Desay as a key beneficiary of the growing automotive software trend. It believes the market may be underestimating the importance of the company's early entry into smart driving, given clients' preference for vendors with products that have a track record of adoption in mass-produced cars. Goldman's price target of 203 Chinese yuan on the stock implies a potential upside of 58.6% to the stock's closing price of 128 Chinese yuan on Mar. 21. The bank's top European stock pick is Infineon for its exposure to the ADAS market. "We believe automotive digitalization, as encapsulated in the trend of accelerating adoption of ADAS, will provide a structural tailwind for Infineon," Chang said. Goldman has a price target of 52.5 euros ($57.80) on the stock, which represents a 75% potential upside to the stock's closing price of around 30 euros on Mar. 21.

Signage outside the new Tesla South Austin showroom within the Yard development in Austin, Texas, U.S., on Saturday, Oct. 16, 2021.

Mark Felix | Bloomberg | Getty Images

Goldman Sachs has named a raft of stocks it thinks will do well as automakers double down on making cars more connected, intelligent, and autonomous.