MBLY - Mobileye: Concerns Overblown As An Inflection Is Near

2023-08-13 06:23:16 ET

Summary

• 2Q23 revenue and gross margin met expectations and operating income surpassed expectations as Mobileye spent less operating expense than anticipated.
• Mobileye reiterated revenue guidance, while operating profit guidance was raised as the company dials back on operating spend.
• SuperVision volume growth will be key in the near-term, and with the number of vehicle models growing from 1 in 1Q23 to 5 in 1Q24, this brings improved revenue diversification.
• Mobileye's development and design win pipeline remains robust and recent wins with Porsche and Volkswagen provide solid business momentum.
• I think we are at an inflection point for Mobileye with SuperVision taking off and gaining traction and I expect more design win announcements with other OEMs for SuperVision in the near-term.

After the 2Q23 results, I am growing my confidence in Mobileye ( MBLY ). Because Mobileye is somewhat in an early stage of its development with SuperVision only having one main customer in 2Q23, the current 2Q23 quarter is not a very good reflection of the company, in my view. The main thing to look at is how SuperVision will grow in the second half of 2023 and 2024, as well as continued pipeline and business development growth in the Mobileye business.

In particular, I think that the company is executing in the right direction with its recent design wins with SuperVision and the continued discussions with major OEMs.

I spent some time to analyze who could be the nine OEMs that Mobileye disclosed that it is having meaningful business engagements for its advanced portfolio which account for 30% of global auto volumes, highlighting a strong and diverse list of engagements.

Let's dive straight into the results.

Business continues to meet and beat expectations

Revenues for 2Q23 came in at $454 million , in-line with market consensus of $454 million. This represents -1% year-on-year growth. As noted in prior quarters, the main headwind in the near-term came from de-stocking of SuperVision units at its main customer.

Gross margins came in at 71.8%, slightly higher than market consensus of 71.2%.

Operating margins were better than expected, coming in at 30.8%, compared to consensus of 24.8%. This was a result of operating expenses being much lower than what was expected going into the 2Q23 quarter.

As a result of this stronger operating margin performance, EPS came in at $0.17 per share, ahead of consensus expectations of $0.12 by 42%.

As a result, 2Q23 results show revenue and gross margins as being in-line and earnings beating forecasts.

Stronger guidance

Mobileye maintains full-year revenue outlook of between $2.065 billion and $2.114 billion for the full year of 2023. This is in-line with market expectations.

However, the company increased operating profit guidance from its prior range of $548 million to $577 million to its revised range of $600 million to $631 million. This is a result of more muted operating expenses than initially expected, dialing back the operating expense spend from the earlier 30% year-on-year to 20% year-on-year today.

With the full year revenue guidance maintained, this guide assumes the EyeQ volumes will grow 10% sequentially in 3Q23 and then grow another 20% sequentially in 4Q23.

I expect SuperVision volumes to more than double sequentially in 3Q23 and then almost double once again in 4Q23.

Positive implications from results and guidance

Firstly, I have been following Mobileye for some time now and heading into the 2Q23 results, there were growing concerns about EyeQ and SuperVision volume, given that the company cut near-term SuperVision estimates in the prior quarter. The fact that both EyeQ and SuperVision volumes were in-line was evidence that those worries were overblown, in my view.

Secondly, I think that the SuperVision inventory correction at its main and only customer, Zeeker, is now largely in the rear-view mirror. Mobileye expects there will be a sequential ramp in volumes from the low watermark in 2Q23 for the rest of 2023 and into 2024.

Thirdly, as we move into 2024, as I will highlight below, management shared that there will be five production vehicle models equipped with SuperVision by 1Q24, up from just one in 1Q23. This means that a lot of the variability and volatility that comes from having just one customer is reduced by 1Q24 and I expect more design wins to come.

Fourth and lastly, I think Mobileye surprised to the upside in its operating income guide. This comes as a result of a delayed transition to the new Jerusalem campus, cost efficiencies and the depreciation of the Israeli shekel.

With that, operating expenses is expected to grow in the low 20% range, down from the earlier 30% growth before. More importantly, management is targeting a similar operating expense expansion in 2024, which brings upside to operating income.

Business development

Mobileye's business development pipeline remains robust in 2Q23. With the design wins that have been achieved in the first half of 2023 and the current opportunity the team sees in its pipeline, management shared that they are on track to match or exceed the record design win activity achieved in 2022.

In the second quarter of 2023, Mobileye saw its first major SuperVision design win outside of Geely Automotive Group. Mobileye announced SuperVision design win with Porsche ( POAHY ) and the company expects “excellent potential” for similarly timed launches across other brands in the Volkswagen Group ( VWAGY ). On top of that, Volkswagen America also announced a testing program for its Volkswagen ID.Buzz vehicles in Austin, Texas, that are equipped with Mobileye Drive , the company’s Level 4 self-driving system, after just months of development and integration activity.

Mobileye extended its basic ADAS leadership position with another design win with a key customer that extended their relationship with Mobileye until 2035.

SuperVision will remain key to the Mobileye investment thesis. Mobileye mentioned that the near-term SuperVision launches continue to be on track, and management expects to have SuperVision equipped on five production vehicle models by the first quarter of 2024. This compares to just 1 vehicle model equipped with SuperVision at the start of 2023. In addition, out of the five production vehicle models expected by the first quarter of 2024, two models are sold outside of China.

On top of that, the software roll out of Navigate-on-Pilot function for Zeekr vehicles are progressing well and is well received by the Chinese media.

Also, in the earnings call, Mobileye shared that the volume cadence in the fourth quarter will be heavier than that of the third quarter, while there is potential SuperVision volume risk in 2024 as a result of carryover of this year's customer volume. That said, management reiterated their high confidence in their original 2026 SuperVision volume targets.

In my opinion, I am encouraged by the fact that Mobileye is moving from just 1 vehicle model with SuperVision from 1Q23 to 5 vehicle models with SuperVision by 1Q24. In addition, management highlighted there will be more to come as the company is engaged in discussions with multiple other OEMs that represents 30% of global automotive production.

Analyzing the nine large OEMs

I looked into the global production data and based on what Mobileye discloses as an "OEM", I attempted to make an educated guess as to who the nine large OEMs that Mobileye is engaging with.

While there may be some players in there that may be wrong, I think that the list should largely be correct.

These nine OEMs include:

1. Polestar
2. Audi
3. One of Volkswagen's other brands
4. Ford
5. Nissan
6. An India-based OEM
7. An established China-based OEM
8. An established China-based OEM
9. Hyundai/Kia.

This list is definitely an exciting one and with this list as my expected list of engagements with Mobileye, I think that the pipeline that Mobileye has is a robust one that will likely grow with time.

Conclusion

I think that the concerns surrounding Mobileye is overblown.

We are seeing an inflection point with Mobileye's SuperVision offering today as the company's long-term opportunity and improving business momentum gives me confidence in the company.

With Mobileye trading at about 44x 2024 P/E today, I think that we have to realize the huge long-term opportunity Mobileye has and the strong growth in revenues and profits we will see in the next 5 years.

I reiterate that Mobileye is growing net profit at a 48% CAGR in the next 5 years, which suggests strong business momentum.

I expect that investors and the market will start to see that Mobileye's current valuation is justified if it continues to provide consistent design win announcements to show that it is executing well towards its near-term and long-term targets.

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