ADI CEO: Future car innovation will mainly come from chips and software

Vincent Roche, CEO of chipmaker Analog Devices, told CNBC on Wednesday that technology is shaping the future of the automotive industry and creating a huge opportunity in the semiconductor sector.

"Semiconductors and software are really the future of cars," he said in an interview with Jim Cramer on "Mad Money," adding that he believes the auto industry will be the "next stop" in the market.

“All the intelligence – in terms of user experience, intelligence, driving experience, etc. – is all achieved through semiconductors and software, and the investment and market in this area are increasing year by year,” Roche explained.

In recent years, automakers have been investing in new transportation options, including electric, connected and self-driving cars. Consumer demand for environmentally friendly products has also driven the shift in market focus.

One area where ADI sees opportunity is in new automotive technologies, such as audio connectivity and infotainment. The company announced a deal with Hyundai Motor Co. in January to supply the company with a fully digital noise cancellation system. Since then, ADI has added five new customers. The company says the audio technology reduces vehicle weight by about 100 pounds and reduces energy use by about 3%.

“As more and more sensors are used, we play a role as a bridge between the physical world and the digital world,” Roche said. “This is a great opportunity for ADI and a good intersection between our existing technology and the needs of automotive companies.”

On Wednesday, ADI reported better-than-expected third-quarter results for fiscal 2020, but revenue fell 1.6% year-over-year to $1.46 billion.

Automotive was one of the company's weaker segments during the quarter, with revenue down 29% from a year ago due to factory closures during the coronavirus pandemic, though ADI reported some recovery in the segment as factories came back online.

ADI, which also supplies battery management equipment for the electric vehicle market, is well positioned to benefit from the growing market for electric vehicles, according to Roche.

"I think we have a long way to go," Roche said. "We are in the early stages of electric vehicles, but my sense is that in the next 10 years, maybe 20% of cars will be electric, and today it's probably 1% or 2% of the market."