Usually when a hardware company talks about how they can address 50 different use cases across 12 different industries, it means they haven’t made inroads into any. This is characteristic of companies with marginal revenues or none. Addressing a very specific use case and conquering it opens doors to adjacent opportunities. NVIDIA did a great job of this as they migrated from video cards to AI chips to data center hardware / software. Others like Illumina struggle to make a cash cow turn into a star. That’s referring to the BCG Matrix, something they teach you in business school that you’ll only ever use when you’re extremely stoned and trying to sound relevant.
But we didn’t come here to debate the merits of the BCG Matrix, we came here to talk about a company that’s focused on one very exciting niche – autonomous driving – and now they’re going to have an initial public offering (IPO). Again.
Mobileye is a leader in the development and deployment of advanced driver assistance systems (ADAS) and autonomous driving technologies and solutions.
Credit: Mobileye
About Mobileye Stock
Mobileye (MBLY) completed their first IPO in 2014 trading under the symbol “MBLY” on the New York Stock Exchange. We first wrote about the company a year later in a piece titled MBLY: The Only Driverless Car Stock to Invest In, and went long the firm shortly after. In 2017, Mobileye was acquired by Intel for around $15 billion. 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).
Substantially all the above revenues come from Mobileye’s commercially deployed ADAS solutions across 800 vehicle models representing system-on-chips (SoCs) deployments in over 117 million vehicles. The company currently ships a variety of ADAS solutions to 13 of the 15 largest automakers in the world and is also developing their full stack offering into products such as:
- Mobileye Chauffeur – expected to be capable of “eyes-off/hands-free” driving with a human driver still in the driver’s seat, in a gradually expanding operational driving domain
- AMaaS – Mobileye Drive™ interfaces with Moovit’s mobility-as-a-service (MaaS) platform – owned by Mobileye – which adds a service layer and a ready-made user base.
- Mobileye Drive – Level 4 self-driving system targeted for fleet-owned AMaaS and goods delivery networks.
The addition of Moovit came courtesy of Intel which purchased the mobility application in Summer of 2020 for $900 million in an attempt to shore up Mobileye’s ability to offer autonomous transport services in the future.
Moovit is known for its urban mobility application that offers travelers around the world the best multimodal trip planning by combining public transportation, bicycle and scooter services, ride-hailing, and car-sharing. The addition of Moovit brings Intel’s Mobileye closer to achieving its plan to become a complete mobility provider, including robotaxi services, which is forecast to be an estimated $160 billion opportunity by 2030.
With over 1.5 billion users in over 3,500 cities across 112 countries, the app paves the way for Mobileye to begin offering autonomous public transportation when the time comes. It’s the same half-a-trillion-dollar opportunity that has ARK Invest throwing out a $4,600 price target for Tesla shares,
The Opportunity
The total addressable market (TAM) for Mobileye is a blue ocean opportunity that could approach $480 billion by 2020 if the company’s estimates are anything to go by.
That large number is said to come from the growth of vehicle autonomy, both on the fleet side and consumer side. With the average car being used about 4% of the time, Mobileye asks why your car couldn’t be out running errands while you’re at work? At a minimum, why not have your car out there offering rides to people instead of sitting all by its lonesome in your workplace parking lot?
Like Tesla, Mobileye is also using drivers to collect loads of big data across the United States and Europe where 90% and 87% of motorway, trunk, and primary road types are mapped respectively. And Mobileye isn’t paying a dime for the 100 petabytes of data they collect each month. You see, the 1.5 million vehicles out there equipped with ADAS solutions enabled by Mobileye are actively collecting 100 petabytes of data per month which is fed to 500,000 cloud CPU cores. A team of 2,300 annotators provide the “humans-in-the-loop” to make sure the data is perceived properly by the AI algorithms that will then power the “cloud ADAS offering” that Mobileye has debuted. Now isn’t that a clever way to prepare for full autonomy – analyze 8.6 billion miles of roads for free.
A Risky Business
Mobileye cites technology as one of their competitive advantages which makes sense when you consider 80% of their employees work in R&D. Having launched their first products back in 2007, Mobileye has had plenty of time learning how the industry works and responding to the demands of customers who command a great deal of leverage. There are no contracts here, no promises of minimum order amounts or guaranteed sales. It all comes down to selling a solution that customers would rather buy than build, but not all customers go the buy route. Tesla is one such firm. They had previously incorporated Mobileye ADAS solutions in their vehicles, but transitioned to their own in-house ADAS solutions. Mercedes-Benz is also employing its own in-house solutions, while other automakers like General Motors and Volvo are looking to develop various parts of the stack in-house.
There are many reasons to be bullish about Mobileye which might help explain why Intel wasn’t too concerned with their IPO timing. Looking past the great story we see a company that has lots of customer concentration risk, something that appears characteristic of how they do business. Back in 2014, around 73% of revenues came from five names – General Motors (30%), Nissan (16%), BMW (14%), and Honda (13%). In 2021, 71% of revenues came from three customers – ZF (35%), Valeo (19%), and Aptiv (17%). As for geographic diversification, Mobileye does much better with 71% of 2021 revenues coming from outside the United States, with three countries accounting for over 50% of revenues – China (19%), Germany (19%), and the United Kingdom (14%).
On the supplier side, STMicroelectronics (STMicro) is the sole supplier of EyeQ SoCs (Mobileye’s flagship hardware product offering) and has not been able to keep up with demand, a problem that’s expected to persist through 2022. (STMicro is the largest European semiconductor contract manufacturing and design company.) This means Mobileye has no inventory and needs to rely on timely shipments from STM to meet customer demand. STM also depends on Taiwan Semiconductor Manufacturing Corporation, so let’s hope that the CCP doesn’t start stretching their limbs too far East.
Regarding survivability, Mobileye has $774 million in cash on hand and a gross margin of 47% which led to losses of $75 million in 2021 (compared to $196 million in 2020). They’re looking to raise $2.5 billion from the IPO, but those proceeds are expected to pay down a dividend they owe Intel up to a certain amount before they’ll forgive the rest. It’s almost as confusing as trying to understand how Mobileye managed to get stuck with $10 billion of goodwill on its balance sheet which is said to result from when they were acquired by Intel. Anyways, it’s all just needless noise that’s best revisited once the IPO actually goes through and the balance sheet can be examined when the dust has settled.
Key Takeaways
We don’t know if what valuation the IPO will be priced at, and until that information is made available there’s little sense in talking about whether or not we ought to consider going long. What we do know is that firms like Ambarella better be thinking long and hard about how well they’ll be able to pivot into a space that Mobileye appears to be dominating.
The banter on Wall Street is that Mobileye might pursue a valuation of 30 to 50 billion dollars when they go public. Using their Q2-2022 revenues of $460 million, we can then figure out what the simple valuation ratio might look like at each of these valuations:
- 30 billion = 30,000 / (460 * 4) = 16
- 50 billion = 50,000 / (460 * 4) = 27
On one hand, there’s a lot to like about Mobileye’s perceived leadership position and exemplary revenue growth. On the other hand, there’s a great deal of risk around their sole supplier situation, key customer revenue concentration, and lack of recurring revenues. If we’re willing to buy Snowflake – arguably one of the most richly priced SaaS firms out there – at a simple valuation ratio of no more than 20, then we certainly wouldn’t consider paying 27 for Mobileye despite their strong revenue growth and leadership position. But perhaps we’re getting too far ahead of ourselves. The IPO needs to happen, and shares need to start trading, before we begin considering if this is a firm we’d like to own.
Lastly, with all the other companies out there trying to peddle autonomous driving hardware (we’re looking at you, LiDAR), it’s important to know what a mature business model looks like, starting with multiple generations of the same product over time – five in the case of Mobileye’s flagship hardware product EyeQ.
The above needs to be accompanied by unit sales that look like this:
That’s why Mobileye spends so much on R&D. They’re always building what customers need, none of this “build it and they will come” rubbish which is characteristic of hardware players working on their third generation of product development, yet have no meaningful revenues to show for it.
Conclusion
Mobileye’s rapid growth and perceived leadership makes for a compelling way to get exposure to the phased implementation of vehicle autonomy. A heavy focus on R&D means they’ll be at the forefront of innovation and able to adapt quickly to whatever the market needs. Established relationships with most large auto manufactures means fingers in wallets which makes for easy upselling / cross-selling opportunities. Unfortunately, that also means automakers dictate the success of Mobileye, a very small number at any given time. We like Mobileye stock enough to watch how the IPO progresses to see what valuation they might command once the dust settles.
Should the IPO proceed as planned, Mobileye stock will trade under same ticker it did before – MBLY.
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