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Investment Thesis
The market for driver assist and self-driving cars is huge and growing rapidly as new technology makes these cars more practical. This rapid growth and a strong market position should make Mobileye (NASDAQ:MBLY) a rapidly growing, highly profitable company.
Mobileye
Professor Amnon Shashua, the current CEO, founded the company and produced the first driver assist system 15 years ago. He has been determined to develop a safe autonomous car that can be produced at mass-market prices. He stayed with the company after its acquisition by Intel (INTC). Under Intel, the company developed the system on a chip called EyeQ, which is the heart of the driver assist and autonomous vehicles. Mobileye now has six versions of the EyeQ. Eighty percent of employees work in research and development, including those who have developed extensive maps to guide the cars as well as software for these systems.
Mobileye’s product line starts with the basic driver assist system, with the chip controlling the driver assist and a front camera. Driver assists are inexpensive. We have all seen ads on self-parking cars and emergency braking. These are easy-to-sell features. The next system adds REM or Road Experience Management. REM has 8.6 billion miles of detailed crowdsourced data that is updated using the cloud. Mobileye has sold 125 million driver assist units and, based on contracts, expects to sell another 270 million units.
The two SuperVision models provide point-to-point autonomous driving. These are new and only represent 1% of systems sales. They contain 360-degree coverage, EyeQ6 chips, and the Responsive Sensitive Safety (RSS). RSS controls the car in a safe human-like manner. The latest program is the chauffeur, which offers radar and lidar (Laser Radar) for safer driving. The chauffeur model is under development. It contains the fully redundant vision system. Mobileye Drive is the advanced model that has yet to be fully engineered. Mobileye has developed a series of systems on a chip and other devices to enhance autonomous driving. They are determined to reduce component costs on such sub-systems as radar and Lidar to make autonomous driving fully achievable.
Finances
Summarized below are the results of the third quarter compared to the prior year. Revenue was up 38%. The cost of these devices has been reduced with volume production so that the gross profit is higher than the revenue growth. There are more upper-end models so that the average price of an EyeQ system is up by 16% to $53. The SuperVision models are only 1% of the volume, but they have a big impact on the average system cost.
The following table compares the Mobileye GAAP income summary with the Adjusted data.
Third Quarter 2022 Financial Summary and Key Explanations
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Mobileye projects that fourth quarter revenue will be up about $100 million from the third quarter due to growth. The growth in engineering will be more modest so that the business should break even on a GAAP basis. Longer-term research and development growth should be lower than the current growth level.
Earnings Per Share Growth
GAAP gross margin is 48% of sales, a very decent number. On an adjusted basis, the gross margin is 74%. The reason is that there is amortization of intangible asset costs. Third quarter 2022 cost of goods sold included $131 million amortization of intangible assets. This cost does not vary by volume. Excluding the amortization of intangible costs, the costs of goods sold is only about 30% of revenue. This means that the gross profit will rise much more sharply than the increase in revenue.
The following chart illustrates this. The data from Q3 2022 is compared to data in the following three years for the same quarter, assuming a growth of 38% in revenue. This is compatible with past trends. The revenue by 2025 from Q3 2022 is projected at $1097 million in my table below. I think the gross profit could triple for a 2.4 times increase in revenue.
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Revenue is growing in this scenario by 38% per year. If research and development and marketing grow at 15% a year, the quarterly earnings would be $0.12 a year in 2023 going up to a dollar per year in 2025. Of course, this is a back-of-the-envelope analysis and is subject to considerable error. It does illustrate the value of Mobileye if the analysis is wrong and a dollar a share slides one or two years.
The SuperVision scenario adds to Mobileye’s value. In the third quarter of 2022, these newly introduced autonomous driving cars represented one percent of the systems but increased revenue by 16%. An additional 10% of SuperVision systems would increase 2023 earnings per share by 46 cents in my view. The point is that it has tremendous upside.
It appears to me that Pat Gelsinger, Intel’s CEO, made a mistake selling Mobileye with a GAAP loss. Intel was originally expecting to receive $50 billion from the sale.
Valuation
The IPO price was $21 per share, and it is currently at $34 per share with negative earnings. This price is probably because of the expectation of future earnings. I believe that a small positive earnings in 2023 of about 12 cents per share will increase the stock price, not because of a small earnings gain but because this is a sign that the future earnings are on track. The start of earnings could produce a stock price growth of $10 to $15 per share in my opinion. Additional SuperVision sales could increase growth by 46 cents to around 60 cents. A price in the $60 range is likely given the excellent prospects for long-term growth.
Risks and Opportunities
Mobileye’s obvious risk is the rising demand. It has a history of continued rapid growth spurred by technical innovation. But the demand uncertainty is clear. The market for autonomous cars such as Mobileye’s SmartVision is more unknown. The value of complex maps, redundant visibility, and driving algorithms is uncertain.
Historically, Mobileye revenue has grown dramatically each year. Mobileye projects revenue of about $5 billion per year by 2030. They expect further growth from improved models with cost reduction to make like components more practical for the mass market. Such a situation will dramatically increase the revenue per year. The belief that this is attainable is why Mobileye spends so much on research and development.
The large-scale development of multiple sensors like lidar and radar on a 360 basis and safe driving software have the advantage of risk reduction in terms of meeting government safety standards. They can meet these standards, but others will have a very difficult time achieving them. They are working with government to build standards, so this is a competitive risk reduction.
It is rare that a high-tech product has so little direct competition. It is also rare that such a company spends almost half its revenue on research and development. Longer term, if the company does not get a good payoff from all the research and development, it will greatly reduce this activity over time.
Conclusions
It is very likely that Mobileye will continue to have a high growth with relatively little direct competition. It is selling products which cost about 30% of revenue. This is a good bet on the future, so it is a strong buy.
Editor’s Note: This article was submitted as part of Seeking Alpha’s Top 2023 Pick competition, which runs through December 25. This competition is open to all users and contributors; click here to find out more and submit your article today!
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