In the first week of this year, I believed that the sensors of Mobileye Global Inc. (NASDAQ:MBLY) itself were breaking down. As the company reset the 2024 guidance in a big way, I saw a tough year coming up, with few green shoots in sight.
As shares have reset some more, and sequential growth is seen in the coming quarters, I see room for potentially a speculative position. While current valuations are demanding, Mobileye’s role in the continued autonomous revolution is likely important, driving the relevance and interest in the shares.
On Mobileye
Mobileye has long been positioned as an enabler of autonomous driving at scale. This positioning triggered Intel Corporation (INTC) to acquire the business in a $15 billion deal back in 2017.
Since then, the company has been applying these solutions to hundreds of millions of cars, with its solutions carried by more than 50 manufacturers, applied in over a thousand models. The company has been working on autonomous features which come in different stages, starting from hands-on/eyes-on, towards hands-off/eyes-on, eyes-off, to fully autonomous driving without a driver. The hands-on/eyes-on technology has been applied to nearly 300 million cars (designs) as volumes decline rapidly in each sequential step of autonomous driving.
On average, such a system solution only came in at around $50 per car in 2020, a number which has risen above $100 here because of the impact of inflation and more sophisticated solutions offered. This is precisely the promise of Mobileye, as these features grow more advanced and capable, average selling prices have real potential to spike from here.
As Intel was facing its issues, facing a competitive threat in its own business, it resorted to direct listing the shares of Mobileye in the fall of 2022. Intel sold a 6% stake (at the time), with the IPO priced at $21 per share. These shares started trading at $27 per share, granting the business a $21 billion equity valuation.
Ahead of the pandemic, Mobileye generated $879 million in sales, accompanied by an operating loss of $86 million. Revenues rose modestly, up 10% to $967 million in 2020, as operating losses more than doubled to $213 million.
The real achievements were made in 2021, as revenue growth accelerated with sales up 43% to $1.39 billion, as GAAP operating losses narrowed to $174 million, although those losses were largely the result of higher R&D efforts and amortization charges.
Momentum continued in 2022, with sales up another 35% to $1.87 billion, with the company guiding for 2023 sales to grow another 20% to $2.22 billion with adjusted operating profits seen around $602 million, or $339 million if we exclude stock-based compensation expenses. Investors liked the pace of progress, as shares have largely traded around the $40 mark during 2023, but shares came crashing down to the $30 mark on the first day of trading in 2024.
A Massive Setback
In January, the company posted preliminary 2023 sales at $2.08 billion, with realistic operating profits seen around $438 million, all in line with the reduced guidance through the year. These sales were based on the sale of a combined 35 million EyeQ and SuperVision units at average prices in the $50s per set, yielding this revenue number, together with some other revenues.
The issue is that the company announced that its customers held some 6-7 million of these units in excess inventory, worth about $400 million, all due to excess inventories held by manufacturers amidst tough supply chain conditions in a post-pandemic world.
The issue was seen in the outlook, with first quarter sales for 2024 set to be cut in half, as full-year revenues were seen at around $1.83-$1.96 billion. Even if I would add back $400 million in excess inventories, revenue growth would be rather modest, at the lower end up just 7%. Furthermore, realistic operating profits were seen largely flat, implying that every dollar deleveraging on the topline has seen a flow-through on the bottom line as well.
Trading at $30, the 810 million shares of Mobileye were granted a $24.3 billion equity valuation, or $23 billion operating asset valuation if we factor in a $1.2 billion net cash position. Trading well above 10 times sales, with no realistic earnings to show for, I was cautious based on the near-term fundamental performance. Of course, the valuation is driven by the hope and role which the company can play in autonomous vehicles in the future. This made me very cautious as the outlook essentially eliminated all the good news for 2024.
Shares Come Down
Later in January, the company announced its 2023 results, but they were not the center of attention. The company reiterated the 2024 sales guidance, with adjusted operating earnings of $270-$360 million being very modest if we account for an estimated $294 million stock-based compensation expense, leaving little realistic earnings to show for.
The company touted the long-term potential, with the backlog reported at $7.4 billion based on 61 million units. In March, the company decided to wind down the aftermarket, which is really the retrofitting unit. Once instrumental to the start of Mobileye, this business has lost relevance with OEMs installing these solutions now at manufacturing. With a $40 million revenue contribution, this impacts total sales by around 2%.
In April, Mobileye reported very soft first quarter results, with revenues down 48% to $239 million, as this was not a surprise, of course. This was even positively impacted by higher selling prices, seen up $7 to $61 per unit, driven by a higher share of higher-margin SuperVision solutions.
Amidst strong deleveraging and huge gross margin pressure, the company posted an adjusted loss of $65 million. This marked $189 million in operating loss deleverage on a $219 million change in revenues, resulting in huge deleveraging even as there was the good news of a large Volkswagen order, adding to the pipeline and backlog of the firm.
As the company reconfirmed the full-year guidance on all fronts, real sales and margin expansion are expected (on a sequential basis) with year-over-year growth considered well in the coming quarters.
Expectations Cool
Since the start of the year, shares have lost another 20% in what generally has been a great year for the markets at large, certainly the technology sector. With 806 million shares trading at $24, and net cash holdings preserved at $1.2 billion, the enterprise value has fallen to $18 billion here. This values the business at about 10 times sales expected this year, but likely 8-9 times if we factor in the soft first earnings quarter report.
Frankly, this valuation multiple compression stands in sharp contrast to the rest of the sector. After an adjusted loss of $65 million in the first quarter, that implies some $335-$425 million in adjusted operating profits in the remainder of the year, while stock-based compensation for that period is seen around $220 million.
This implies that the business could really earn up to $200 million (at the higher end of the guidance) in the 9-month period. This is not the most impressive number, but obviously, the company is still in investing mode, in terms of R&D and design wins. All this might ignite appeal and momentum in the second half of the year, even as the automotive market is cooling down.
Frankly, I see room for upside surprises here. Mobileye can not be valued on the current prospects alone, but it really is the conversion of the backlog which should drive growth from here. The company is cash flow positive and operates with a strong balance sheet, all comforting factors.
Given all this, I might contemplate a small speculative Mobileye Global Inc. position here anticipating a re-rating, or even over time some kind of M&A.
Read the full article here