Jan Hetfleisch
Elevator Pitch
My rating for Intel Corporation’s (NASDAQ:INTC) shares is a Hold.
In my previous update for INTC written on August 26, 2022, I touched on how the CHIPS Act will affect Intel. I choose to focus on the IPO of Mobileye (MBLY), Intel’s wholly-owned subsidiary, in the current article.
I like the fact that there are various actions that Intel could possibly take to unlock the value of its businesses and enhance shareholder value. The planned Mobileye IPO is one example of how Intel can extract more value from its assets. The key impact of Mobileye’s public listing is that this makes it easier for investors to assess how much Mobileye is worth, and its contribution to Intel’s overall valuations.
However, execution matters when it comes to value unlocking and value creation. It will come as a disappointment for investors that Mobileye’s indicative IPO valuation has fallen short of expectations. This in turn casts doubts on INTC’s ability to extract value from its other emerging businesses. Therefore, I decided to maintain a Hold rating for INTC.
What Is Mobileye?
Mobileye issued an S-1 filing last week on October 18, 2022, with respect to the company’s planned “initial public offering of shares of our Class A common stock.”
In the S-1 filing, Mobileye called itself “a leader in the development and deployment of advanced driver assistance systems (‘ADAS’) and autonomous driving technologies and solutions” and noted that it “pioneered ADAS technology more than 20 years ago.” Separately, a December 2021 Bloomberg article cited research firm Guidehouse Insights’ data suggesting that Mobileye boasts an 80% share of the worldwide “advanced driver-assistance vision systems” market.
Mobileye’s shares were previously listed on the NYSE between August 2014 and August 2017, before being subsequently delisted with Intel’s acquisition of the company. INTC currently owns all of Mobileye’s shares, and it is indicated in Mobileye’s S-1 filing that Intel has the intention to “retain majority ownership” in Mobileye post-IPO.
INTC Stock Key Metrics
Prior to discussing Mobileye’s IPO and how this could impact Intel, it is relevant to assess Mobileye’s recent performance by reviewing INTC’s key Q2 2022 financial metrics.
In its Q2 2022 earnings presentation slides, Intel revealed a number of metrics pertaining to Mobileye.
INTC’s overall Q2 2022 top line of $15.3 billion missed analysts’ expectations by a significant -14.5%. In contrast, Mobileye was a bright spot, as its second quarter revenue was the highest it has ever been in its history. Specifically, revenue for Mobileye expanded by +41% YoY and +17% QoQ to $460 million in Q2 2022. Mobileye’s operating income also rose by +43% YoY to $190 million in the recent quarter, which is equivalent to a very healthy operating profit margin of 41%.
Looking forward, Intel guided that Mobileye will continue to achieve growth in the second half of 2022 on the back of “new products” and “new customers” at its prior Q2 2022 earnings briefing on July 28, 2022. INTC’s optimism relating to Mobileye’s near-term growth prospects is supported by its disclosures at the recent earnings call that Mobileye’s 1H 2022 “design wins” should translate into “37 million units of projected future business” vis-a-vis “16 million units actually shipped” for 1H 2022.
As such, it shouldn’t be a surprise that Intel is eager to monetize the value of its 100%-owned subsidiary, Mobileye, with a public listing, taking into account Mobileye’s excellent performance in Q2 2022.
Is Intel Impacted By Mobileye’s IPO?
Mobileye’s IPO should have a positive impact on Intel in terms of unlocking value, but the actual impact might be much less than what investors had hoped for.
At Evercore ISI’s 2nd Annual TMT Conference on September 7, 2022, which took place before Mobileye’s S-1 filing in late October, Intel referred to the planned Mobileye IPO as “a huge value creation event.” More significantly, INTC emphasized at the recent Evercore investor event that investors and analysts will “start to develop a very different perspective of the company’s value going forward” following the completion of Mobileye’s public listing.
Intel’s comments at Evercore’s TMT Conference raised the market’s expectations of Mobileye’s IPO valuations, but investors were disappointed following the release of Mobileye’s S-1 filing on October 18, 2022. Based on the S-1 filing, Mobileye’s shares will be priced in the $18-$20 range as part of the IPO, which implies a valuation of between $14.4 billion and $16.0 billion for the company as a whole. In comparison, Intel had bought out Mobileye for $15.3 billion in 2017; and there were earlier expectations that Mobileye would carry a valuation of $30 billion or even as high as $50 billion.
An October 24, 2022 Seeking Alpha News article cited a report from the Wall Street Journal noting that there is unverified news that INTC is “looking at pricing the shares (of Mobileye) at or above the upper end of its targeted range.”
In a nutshell, the planned IPO of Mobileye is a meaningful deal, but the expected value accretion from this corporate transaction is probably not going to be as significant as what was initially expected. Assuming Mobileye can command a valuation of $16 billion with the IPO, this will represent about 14% of Intel’s current market capitalization of around $111 billion. But a $16 billion valuation for Mobileye is only 5% higher than Intel’s purchase consideration of $15.3 billion in 2017, and this will also suggest that the prior acquisition hasn’t been a fantastic deal.
What Should Intel Investors Consider Going Forward?
INTC has placed Mobileye, Intel Foundry Services or ‘IFS’, and Accelerated Computing Systems and Graphics Group or ‘AXG’ businesses under the emerging business segments category, as indicated in its second quarter results presentation. Going forward, Intel’s investors should consider whether the company can enhance shareholder value either by monetizing its emerging business segments via corporate transactions or accelerating the growth of these businesses with more ambitious plans.
Intel had stressed at the Evercore TMT Conference in early September that the Mobileye listing “is a first value creation exercise for us.” At this investor event, INTC also referred to Mobileye and the other emerging business segments as “long-term R&D projects” which will be “industry-shaping” if they come to fruition. In addition, Intel also mentioned its emerging business segments at its previous 2022 Investor Meeting in January, noting that its emerging businesses operate in “large, growing markets” which will allow the company to “overachieve.”
Using AXG and IFS as examples, INTC does have opportunities to grow faster and create greater value with its emerging businesses. AXG might potentially give companies like Advanced Micro Devices (AMD) and NVIDIA Corporation (NVDA) a run for their money in the GPU (Graphics Processing Units) space in the long run; while IFS could be a new growth driver for the company, benefiting from an increase in outsourcing demand.
Is INTC Stock A Buy, Sell, Or Hold?
I rate INTC stock as a Hold. There are multiple levers that Intel can pull to unlock value for the benefit of its shareholders. Specifically, Intel’s emerging businesses offer lots of opportunities to create value. Unfortunately, INTC’s first attempt at extracting value from its emerging business segments doesn’t seem encouraging, given that Mobileye’s indicative IPO valuation appears to be lower than expected. I continue to have a mixed view of Intel’s shares. I will consider turning bullish on Intel’s stock in future, if there are signs indicating that INTC is having greater success at creating value with its emerging businesses.
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