Mobileye Stock: Pressing My Brakes, On This Bumpy Road Ahead

seekingalpha05-13

Mobileye faces challenges like flat revenue growth and a high stock valuation.Despite its focus on advancing technology for vehicle safety, uncertainties around inventory management and growth ...

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Scharfsinn86Investment Thesis Mobileye (NASDAQ:MBLY), one of the leaders in advanced driver-assistance systems (\"ADAS\"), is on a path for no topline growth this year. On top of that, the stock is priced at a large premium. According to my estimates, the stock is priced at around 55x forward non-GAAP operating profits. Simply put, I believe that this stock offers investors a poor risk-reward. And that investors should not look to its lagging share price as an opportunity to buy the dip. In short, investors would do well to avoid this stock. Rapid Recap Back in March, I wrote,  [...] [Mobileye] has some positive and negative aspects facing its stock. The positive is that the business holds no debt and significant cash, which presently reaches 6% of its market cap. The negative is that this business is demonstrably overpriced. I recommend that investors steer clear of Mobileye Global Inc. stock.  This is a stock that I've been neutral on for some time.   Author's work on MBLYIn fact, since I went from bullish to neutral, this stock is down nearly 30%, while the S&P500 is up 14%. In hindsight, this was the right call to make. And now, looking ahead, I reaffirm my stance, that this stock isn't worth chasing. Mobileye's Near-Term Prospects Mobileye focuses on creating advanced technology to help drivers stay safe on the road. They work closely with car manufacturers to install their cutting-edge systems that assist drivers with tasks like parking and staying in their lanes. Mobileye also supplies sensors that help vehicles become more autonomous, meaning they can drive themselves to some extent. They have partnerships with many big car companies, and their technology is used in about a third of all cars on the road. Mobileye's technology can work in both electric and traditional cars, and they expect more car companies to start using their systems in the future. Moving on, Mobileye charges that it witnessed solid volume growth in its core ADAS business and that Q1 2024 posted its best-ever design win quarter for cloud-enhanced ADAS. The start of production of the next-generation high-volume ADAS chip, the EyeQ6L, further enhances Mobileye's competitiveness by offering increased processing power and supporting incremental safety. Additionally, Mobileye's advanced product portfolio, including SuperVision, Chauffeur, and Drive, presents significant growth opportunities. The increasing demand for eyes-on, hands-free features positions Mobileye for further expansion. However, Mobileye also faces challenges. For example, the decline in EyeQ volumes due to inventory correction is likely to cause a drag in EyeQ shipments, which could be a drag in revenue growth in 2024. Additionally, the uncertainty surrounding the timing of late-quarter shipments and the need to maintain steady purchasing of EyeQ chips could impact inventory management. Given this background, let's now discuss its fundamentals. Mobileye is Not a Growth Company MBLY revenue growth ratesIn my previous article, I wrote,  MBLY has the right narrative, of holding substantial market share for its ADAS technology in the automotive industry. But beyond an alluring narrative, we see a very cyclical business. And worse than being cyclical, we see that its guidance concretely points towards no growth in the year ahead.  Today, I echo this commentary. MBLY is a cyclical business. It has some good periods of growth, followed by suboptimal periods. This consideration is depicted in the graphic above. More specifically, if things go well for MBLY in 2024, and it surpasses the high-end of its guidance, MBLY will deliver flat y/y revenue growth. That's if things go well. If things slow down slightly, this business could end up seeing its revenues shrink this year by 5%. That's the range that investors should be thinking about. Given this outlook, I struggle to see this stock as underpriced. Yes, the stock has fallen slightly this year. But where the share price was last week or last month provides no indication of where it will be next week or next month. The share price will move alongside investors' expectations of the intrinsic value of the business. And I believe that investors' expectations are too high for MBLY, a topic we discuss next. MBLY Stock Valuation -- 55x Forward Operating Profits In the best-case scenario, MBLY's adjusted operating income will be up approximately 45% y/y from the $247 million reported last year to the $360 million expected this year. However, the pressing question remains: can Mobileye be expected to maintain its bottom-line growth in 2025, given its limited top-line expansion? The answer to this thesis is likely to be negative. Even if we generously presume that in 2025, MBLY can grow its underlying adjusted operating profits to $400 million, Therefore, given this consideration, does it make sense to pay approximately 55x next year's adjusted operating profits? I don't believe it does. Meanwhile, I want to make it clear that I do recognize the appeal of driver-assistance systems (''ADAS'') and autonomous driving technologies for automotive applications, but I have opted to invest with Ouster (OUST) instead. Disclosure: I'm long OUST. These two companies don't directly compete with each other, as they operate in different areas of the sensor and perception technology landscape. Mobileye's focus is more on vision-based systems, while Ouster specializes in LiDAR sensors. However, they do indirectly compete in the broader market for autonomous vehicle technology. I simply believe that when it comes to investing, it's much better to invest in a business where expectations are muted and the narrative is outdated, rather than an investment where the best-case scenario is already priced in. No investment strategy is perfect, of course. Indeed, MBLY has ample cash on its balance sheet, which will provide it with ample flexibility to continue investing in its near-term prospects. But I don't find MBLY provides me with enough upside potential. The Bottom Line In my assessment, Mobileye confronts hurdles such as stagnant revenue growth projections and a steep stock valuation, approximately 55 times forward non-GAAP operating profits. While the company remains committed to innovating in vehicle safety and autonomy, including the development of its next-gen ADAS chip and advanced product range, uncertainties surrounding inventory management and growth prospects warrant attention.  Given its subdued growth outlook together with its inflated stock, I'm sticking firmly to the sidelines.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.5","shortVersion":"4.22.5","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2435632583"}