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The world of tech investing is like Willy Wonka’s Chocolate Factory for newbie investors. They’re all looking for golden tickets, and they all want to sample every candy out there that looks tasty. A rock-star marketing team can present a product so well that it appeals to investors, not just customers. Couple that with a decent investor relations team and the bull thesis should be blatantly obvious to any retail investor that comes around for a look. But you can’t hold every stock out there, so how do you know which stories to go long?
The answer is not to invest in stories. Avoid all the glossy marketing materials and investor decks until you’ve completely scrutinized what the company tells the SEC, all of which is accessible via the SEC’s document database – EDGAR. No company management team wants to end up in a courtroom, so legal teams often perform CYA on what’s filed with the SEC to make sure no “material information” is omitted. Boring as 10-Qs or 10-Ks might be, they’re the source of many useful insights. If you don’t spend a day investigating a company at this level of detail, then you end up with fluff pieces like what the Fotley Mool churns out.
Mobileye Stock: An Autonomous Driving Pure-Play
Any thesis with a potential trillion-dollar total addressable market (TAM) must be scrutinized. Starlink claims that global broadband represents such an opportunity, but it’s a moot point given shares of the company aren’t publicly traded. Also in the Elon Musk camp would be the autonomous driving opportunity which is a key driver behind ARK Invest’s bullish Tesla thesis. Pick-and-shovel plays on autonomy include LiDAR stocks which represent a technology that “you know who” calls a fool’s errand, at least for self-driving cars. But many automakers think otherwise, which is why LiDAR technology and computer vision are the eyes of tomorrow’s autonomous contraptions of which there will be many.
Mobileye was a stock we held prior to it being acquired by Intel (INTC), and our recent piece on Mobileye Stock: An Autonomous Driving Pure-Play talked about how, “going private did wonders for Mobileye, as revenues grew at a compound annual growth rate (CAGR) of nearly +27% over the past five years (values in red are estimated).”
Getting back on the Mobileye train would be an easy way to get exposure to autonomous driving hardware. Now that the IPO is complete, we can vet the opportunity starting with something we couldn’t calculate before – valuation.
Valuing Mobileye Stock
One of the most important skills you learn in business school is how to “leverage” the hard work of others for your own benefit. Find someone who did all the heavy lifting, give them a one-sentence stroking, then regurgitate all their key findings as if you did the research. That brings us to an article published on CTech by Sophie Shulman, someone whose ability to competently and thoroughly analyze companies is only surpassed by her intelligence and beauty. <Insert obligatory screenshot of original piece and call it good.>
Mobileye’s IPO will be the largest ever by an Israeli company, yet is a disappointment because they’re going public at a low valuation relative to when they were acquired, says the article. We’re not disappointed the company is going public at almost the same valuation five years ago, we’re dancing on the rooftops. Are you kidding? We get to potentially purchase a company that’s now ascribed the same value as when Intel bought our shares five years ago. But before we go making assumptions, let’s do the math ourselves.
Go to the latest filing document (in this case, the Q3-2022 10-Q), and look up the number of outstanding shares which can always be found on a company’s income statement. For Mobileye, it’s listed as 750 million “weighted-average number of shares used in computation of earnings.” Now, multiply that by the current share price of $32.98 and you get a market cap of around $25 billion. That doesn’t quite match Yahoo Finance which lists 795,762,000 “basic average shares,” but a six percent discrepancy isn’t worth digging into, so let’s just stick with the Yahoo Finance number.
Now, let’s calculate our simple valuation ratio (SVR) which is market cap divided by annualized revenues (all of the below numbers are in billions):
27 / (4 * .45) = 27 / 1.8 = 15
Here’s how that number compares to a handful of stocks in our tech stock catalog.
While we compared Intel to Mobileye in the above table, the comparison isn’t fair because the former is struggling to find growth with Mobileye being the best-performing segment, while the latter is the best thing Intel has going for it. So why did Intel spin out Mobileye to begin with?
Intel and Mobileye
Our recent piece on Finding the Best Semiconductor Stocks talked about how Intel is planning to resume growth with their most appealing opportunity being Mobileye. The amount of control Intel has over Mobileye needs to be considered. Following the IPO, Intel still owns nearly all the company – 94% of outstanding shares.
Ms. Shulman of CTech posits that one reason Mobileye had an IPO was so they could attract and retain better talent given how low Intel’s shares have sunk. Equity-based compensation at Intel would have been with Intel shares, so Mobileye engineers have been carrying the weight of the entire company and being penalized for it. Co-Founder and CEO, Amnon Shashua, is said to have been pushing for the IPO to happen to increase morale, and he probably has a lot of sway along with his fellow Israelis. He who commands the troops of Intel’s most successful segment will have lots of leverage at the negotiation table, so now we can start to understand why the IPO happened in the first place, especially right in the (crosses fingers) middle of a bear market.
Unfortunately, there are some red flags that seriously jeopardize the chances we’ll return to a long-term committed relationship with Mobileye stock.
Some Red Flags
Getting back to the comment about valuation, it’s always best to set a target and stick with it. Mobileye originally priced their shares at $21 for the IPO which would have represented an SVR of around 9, so that’s as good a valuation target as any, but we’d need to overlook the heavy customer concentration risk. This begs the question, how can a company like this possibly keep revenues growing consistently over time when three customers accounted for 71% of total revenues first three quarters of this year and last?
Then there are some oddities on the balance sheet – like nearly $11 billion in goodwill which they inherited from being acquired by Intel. We’re not accountants by any means, but does anyone else find this totally out of place? Intel overpays for a company, then spins the company out and saddles them with all the goodwill. What this might lead to is a Livongo-type situation where they write a bunch of it off and the share price takes a massive dump.
Then there’s the dividend note liability of $3.4 billion which we can only assume relates to Papa Intel as well. This is actually an excellent candidate for a Harvard Business School Case Study – try to figure out what Intel’s next move based on what’s known to-date. If Ms. Shulman is right, then Intel will sell more Mobileye shares as the price appreciates (perhaps within the six months following the IPO) to generate more cash. This shouldn’t involve any dilution, so would only serve to increase liquidity, but there are too many things that could potentially go wrong for Mobileye. What if a major customer decides to develop technology internally like both Tesla and BMW did, both who were customers of Mobileye?
Mobileye believes there’s lots of growth upside, but CTech’s article argues that the market is mature, and that the commodity product Mobileye produces will soon see margins squeezed.
The market for driver assistance systems in which Mobileye was the global pioneer has matured, but it is not large and revolutionary enough to establish a value of tens of billions of dollars and is mainly on the way to becoming a relatively mature market in which profitability decreases as the products become a commodity.
Credit: CTech
Autonomy isn’t just about automobiles though, and we’re interested in getting exposure across more than just the robotaxi opportunity.
The Autonomy Theme
ARK assumes that Tesla dominates in autonomous driving, but is it really a winner takes all game? There are numerous use cases for autonomous driving including:
Airport or campus fixed-route shuttles (very easy)Vehicles in industrial spaces (easy)Driver assistance tools (medium)Buses and long-haul trucking (hard)Robotaxis (very hard)
Numerous competitors will attempt to address each of these use cases, all of which will need to purchase hardware. That is, unless some pull a Tesla and decide to develop their own hardware internally. So, here’s a question. Aside from Tesla, Mobileye, and LiDAR stocks, what other ways are there to invest in vehicle autonomy for retail investors? Any candidates will likely be found in the same pastures that Mobileye and Intel graze in – the semiconductor industry. In a coming piece, we’ll be vetting a semiconductor ETF to look for compelling names while keeping a special eye on autonomy. But as we say, it’s always best to invest in leaders, and that appears to be Mobileye when it comes to computer vision.
The red flags mentioned earlier create potential future events that could impact shares. Loss of a key customer, or having to write off some of that goodwill, are both events that would significantly impact share price. Then there’s the prospect of a continuing bear market, a tide that will lower all ships. Maybe the best approach would be to set an aggressive valuation target, then hope Mobileye hits it so you can buy some cheap revenue growth. CTech concludes their analysis with a sentence that mirrors our sentiments.
Mobileye’s main challenge will be to justify its value minus the dream of the autonomous vehicle market that hangs over its head like the intangible asset that Intel burdened it with at the time of separation.
Credit: CTech
Conclusion
We really wanted to love Mobileye again, but their time at Intel resulted in too many red flags that offset the attractiveness of their autonomous driving pick-and-shovel appeal. For those who find the company appealing, there are numerous events that could take place which might adjust the valuation downwards to present a buying opportunity. Maybe it’s best to set a target valuation level and accumulate a position at that price or lower.
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