Mario Tama
When shares of Mobileye Global (NASDAQ:MBLY) went public late in October, I wondered if investors were taken for a ride. The public offering was more or less a listing process by its shareholder Intel (INTC) which floated a less than a 6% stake in order to get a real-time quote on its most promising assets, generating some minor proceeds in the process as well.
A Recap
Mobileye has a mission to enable autonomous driving at scale. The company has partnered with Intel before the latter bought the company back in 2017 in a $15.3 billion deal, to accelerate growth of the business and increase its adoption. The company has grown to employ 3,000 by 2021, mostly focusing on R&D, with over a hundred million cars across the globe now equipped with some features of Mobileye. Adoption is carried by some 50 manufacturers and some 800 vehicle models.
The addressable market is huge, certainly as the first features of autonomous driving are just the earlier and the easier steps.
The IPO took place at $21 per share, actually two dollars ahead of the preliminary offering range (whose expectations have come down already during the year). With 796 million shares outstanding and shares rising to $27 on their opening day of trading, Mobileye commanded a more than $21 billion equity valuation. To put this into perspective, Intel earlier hoped for a $50 billion valuation for the assets.
This was a huge valuation for a business which posted sales at $879 million in 2019, revenues which were up 10% to $967 million in 2020, to rise by a spectacular 43% to $1.39 billion in 2021. Pro forma operating losses came in at $86 million, $213 million, and $174 million, respectively for these years, with losses driven by large R&D expenses and the amortization charges on them.
Revenues rose 21% to $854 million in the first half of 2022, yet an operating loss of $73 million was not that impressive. The preliminary third quarter results provided some reasons to be upbeat as sales were seen up 38% to $450 million, with GAAP operating losses seen between $25 and $29 million.
With revenues trending at $1.8 billion per annum, the company traded at 12 times sales at the time of the offering, which is arguably low given the huge and rapidly growing addressable markets. For that to become reality some real innovation will have to be delivered upon, as the company still posts losses along the way.
Moreover, the company remains very tightly controlled, as the question is if and how quick Intel would want to sell more shares, depending on its own strategy and cash needs to revamp its own operations, which have suffered from fierce competition, poor R&D performance, and large capital expenditure requirements.
Rocking Out Of The Gate
Since the public offering, shares have risen further. Shares have gradually risen further and now trade at $34, after even having traded briefly around the $37 mark. The $7 share price appreciation mark about 25% gains in the time frame of just two months, but even more so in a difficult time for the market at large, is quite an achievement.
On the corporate front it has been rather quiet, with only the third quarter results being released early in December. The quarterly numbers revealed a 38% increase in quarterly sales to $450 million, in line with the guidance provided at the time of the public offering.
There were reasons to become upbeat. The company saw projected volumes from design wins totaling 54 million units in the first nine months of the year. This is more than twice the 24 million shipments which involve Mobileye products (estimated) over the same time period. Moreover, the average selling prices are increasing as well.
The company posted a GAAP operating loss of $25 million for the period, while simultaneously posing a $143 million adjusted GAAP operating profit. The $168 million difference is largely explained by $131 million in amortization expenses and only by a small extent by stock-based compensation. Adjusted for stock-based compensation expenses, the company posts operating profits at a run rate of $400 million, or even a bit more.
The balance sheet requires a bit more attention following the spin-off as it appears to be that the company operates without much net debt post the offering. The guidance for the fourth quarter is impressive, probably the reason for the solid performance of the shares. Fourth quarter sales are seen between $527 and $545 million, with adjusted operating profits seen between $169 and $184 million, up meaningfully from the $143 million number in the third quarter.
This momentum is noteworthy as many tech names are issuing profit warnings left and right. With revenues trending at around $2.1 billion and operating profits coming in at around half a billion (adjusted for stock-based compensation expenses) I am impressed with the performance. The issue is that the current market capitalization has risen to about $27 billion, equal to about 13 times sales and more than 50 times operating earnings.
Concluding Remarks
I am the first to admit that I have been too cautious when I looked at the prospects for the company directly after the offering. The question is not necessarily if the company can actually facilitate full autonomous driving, but all the features aiding toward that direction will already help the business case of Mobileye.
Given the unique positioning, I remain upbeat on the long-term potential of the business, and thus its shares, but fear that current prices and times are not the time to get excited, certainly not on a relative basis.
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