MBLY - Mobileye: Damaged Goods

2024-01-04 12:30:26 ET

Summary

• Mobileye Global warns of inventory issues and expects 2024 guidance to fall far short due to excess supplies caused by double EyeQ ordering during Covid.
• The ADAS chip company guided to 2024 revenues of only $1.9 billion suggesting a bigger problem than the 6 to 7 million excess chip inventory at Tier 1 customers.
• MBLY stock still trades at an elevated 12x 2024 sales targets despite the 25% dip.

Since going public via the spin-off from Intel ( INTC ) in late 2022, Mobileye Global Inc. ( MBLY ) has constantly traded at a premium valuation. The ADAS chip company just announced a massive warning due to inventory issues at the end of 2023. My investment thesis remains Bearish on the stock even after the nearly 25% loss in early trading today, January 4th.

A Big Warning From Mobileye

Mobileye warned investors 2024 guidance will fall short of consensus expectations due to excess inventory at Tier 1 customers. The warning is blamed on customers building up excess supplies during the periods of chip shortages during Covid.

The problem here is that Mobileye didn't identify the problem until working with customers to determine potential orders for 2024. The management team should've done a far better job at deriving inventory usage by customers considering the readily available vehicle sales data and signs customers were double ordering to ensure supplies.

At about 40 million in annual EyeQ SoC sales based on a $53 per unit price, Mobileye missed a huge inventory buildup at Tier 1 customers. The company guided to a slight miss for Q4 ( earnings expected on January 26th), but the big impact to numbers should show up in Q1, where orders will be cut dramatically to account for the excess inventory and the lack of Tier 1 customers needing new supplies.

Mobileye guided Q1 '24 revenues down 50% from the $458 million level from last year. The chip company listed an average system price of $54 per chip last Q1, suggesting chip sales of ~8.5 million, and the current sales would support cutting ~4.25 million from those sales for the quarter.

Mobileye only forecasts flat to up 5% sales in the remaining quarters of 2024, suggesting some lingering impacts throughout all of next year. Remember, the Supervision chips were supposed to boost sales in 2024, leading to another year of big growth.

The consensus analyst forecast was for sales of ~$2.6 billion for 2024, suggesting an ~$300 million cut from the Q1'24 targets is only a fraction of the hit for the year. Mobileye provided an ~$1.9 billion revenue target for 2024, or nearly $0.7 billion below consensus targets, suggesting up to 13 million worth of chip sales below original targets.

The guidance is supporting a much bigger inventory issue or a mounting sales issue in 2024.

MBLY Stock Is Still Too Expensive

Mobileye Global Inc. stock had a market cap of $32 billion heading into this massive warning. Mobileye still has a valuation of $24 billion after the stock has slumped around 25% in early trading.

The stock still trades at over 12x sales targets for 2024, and some questions should exist on actual demand levels. Mobileye only grew Q3'23 sales by 18%, with growth rates possibly elevated due to the extra ordering situation.

The company will have a brutal 2024, and the business is damaged now due to the inability to manage inventory levels. Investors shouldn't rush into Mobileye at an elevated valuation, and questions about inventory and ordering controls when the management team will clearly need most of next year to resolve the issues and start fresh in 2025.

Takeaway

The key investor takeaway is that investors shouldn't have owned Mobileye at such aggressive stock valuations starting 2024 in the first place, and the stock doesn't get any more appealing on this dip. The company will need to achieve 20%+ growth rates in 2025 in order to warrant the current stock price, leaving limited upside for existing shareholders even as risks exist that Mobileye has a bigger problem with underlying demand.

Investors should avoid Mobileye Global Inc. stock on this dip.

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