MBLY - Mobileye Global: Its Own Sensors Break Down

2024-01-04 18:04:43 ET

Summary

• Mobileye Global Inc. has seen continued growth since its IPO in 2022, but surprised investors with a profit warning early in 2024.
• The company's sales and operating profits have been fluctuating in 2023 as the automotive sector has seen some challenges, after supply chain issues opened up.
• Mobileye's outlook for the first quarter of 2024 is outright dismal due to a massive inventory glut, with sales expected to be cut in half, raising concerns about growth and valuations.

In the final days of 2022, I concluded that Mobileye Global Inc. ( MBLY ) was moving ahead full throttle, as it has done very well since its IPO , which took place in a difficult market environment in the months before.

While there was much to like about the positioning of the business, there were concerns at hand as well (mostly related to valuations). The company has seen growth continue in 2023, albeit at a slower pace, yet surprised its investors with a huge and lasting profit warning as 2024 starts, making me very cautious here.

About Mobileye And Its IPO

Mobileye aims to enable autonomous driving at scale, as this strong positioning triggered Intel Corporation ( INTC ) to acquire the business in a $15 billion deal in 2017, in order to accelerate its growth and adoption. Ever since, the company has seen continued growth as hundreds of millions of cars have features developed by Mobileye, carried by over 50 manufacturers and represented in nearly a thousand models.

With Intel facing real issues of its own, it decided to direct list shares of Mobileye. It sold a 6% stake, with the IPO taking place at $21 per share in the autumn of 2022, when the technology sector at large was facing tough times.

Shares rose to $27 per share on the first day of trading, granting the company a $21 billion equity valuation, which was more than the purchase price back in 2017. However, that resulted in modest returns if we account for follow-up investments and the passage of time, with Intel hoping to fetch a $50 billion valuation for the assets.

Pre-pandemic, Mobileye generated $879 million in sales, although accompanied by an operating loss of $86 million. Revenues rose by 10% to $967 million in 2020, yet operating losses rose sharply to a $213 million. Revenue growth accelerated, up 43% to $1.39 billion in 2021, with operating losses narrowing to $174 million, as GAAP losses were largely the result of large R&D expenses and amortization charges.

With revenues up 21% to $854 million in the first half of 2022, and preliminary third quarter sales seen up by 38% at the time of the IPO, operating momentum was improving, as modest accretion on the bottom line was seen as well. Needless to say, all of this resulted in demanding valuation multiples with revenues trending at $1.8 billion, as a >$10 times sales multiple was accompanied by quicker growth, but came amidst GAAP losses being reported, and the fact that the company remained tightly controlled.

Shares even rallied to $34 by late December 2022, as third quarter sales rose to $450 million, with adjusted operating profits reported at $143 million, with the reconciliation largely due to amortization charges, and not stock-based compensation expenses. This all looked a lot more impressive, with fourth quarter sales convincingly seen above the half a billion dollar mark, but at 13 times sales and 50 times adjusted operating profits, shares were by no means cheap.

Range Bound

Since the start of 2023, shares of Mobileye have been trading in a relatively tight $35-$45 trading range. In January of the year, the company announced a convincing 59% increase in fourth quarter sales to $565 million, with adjusted operating profits reported at $217 million, or $155 million if we back out stock-based compensation expenses.

This made that full year sales rose by 35% to $1.87 billion, as the company guided for 2023 sales to grow by about 20% to $2.22 billion (at the midpoint of the guidance). Adjusted operating profits were seen at a midpoint of $602 million, or $339 million if we factor in stock-based compensation expenses, revealing realistic operating earnings of just $0.43 per share.

First quarter sales rose by 16% to $458 million, marking slower growth due to tough market conditions in China. The midpoint of the full year sales guidance has been cut to just $2.09 billion, with realistic operating profits seen at around $293 million.

In June, Intel sold 38.5 million shares of the company at $42 per share, and that is even excluding the green shoe option. In July, investors had to swallow a real disappointment, with second quarter sales down a percent to $454 million. While the company maintained the sales guidance, it actually hiked the earnings guidance, which felt a bit counterintuitive, but came as supply chains eased up for Mobileye itself as well.

Momentum returned in October when Mobileye reported an 18% increase in third quarter sales to $530 million, but it cut the full year sales guidance to $2.08 billion nonetheless. Realistic operating profits were seen around $400 million, due to higher operating profits and lower stock-based compensation expenses, resulting in operating earnings around half a dollar per share.

A Big Negative Surprise

In the first trading sessions of January, Mobileye came with a big negative surprise for investors. Preliminary full year results reveal that 2022 sales come in around $2.08 billion, largely in line with the latest revision, with realistic operating profits seen as high as $438 million, looking quite comforting and better than guided for.

At this pace, the company sells about 35 million units of EyeQ and SuperVision, with average prices in the $50s, as the multiplication of both numbers yields a roughly $2 billion revenue number. This number is important, as the company announced that its customers hold 6-7 million of these units (almost all EyeQ) in excess inventory, worth up to $400 million here, the result of excess inventories held by manufacturers in order to navigate supply chain constraints.

Hence, the outlook for the first quarter is outright dismal, with sales expected to be cut in half, although that growth should likely return later in the year, with revenues for the year now seen down to $1.83-$1.96 billion. This is worrisome, because even if we add back about 20% to this revenue number, if the inventory glut has not happened, realistic revenue growth would be rather modest.

Moreover, realistic operating profits are seen close to flat, barely positive, which compares in a huge way to the profits seen this year, with every dollar decline in revenues more than working through on the bottom line, being the second negative surprise here.

What Now?

The 810 million shares of Mobileye have fallen to the $30 mark, down a full ten dollars, as the business is granted a $24.3 billion equity valuation here. This includes about $1.2 billion in net cash , as the resulting $23 billion valuation still comes in at double-digit sales multiples amidst a lack of real earnings here.

A couple of days into the new calendar year, Mobileye Global Inc. is already acknowledging that this is a lost year, but worrisome is the performance if we adjust for the inventory glut, with modest growth seen and minimal margins reported. Even if "regular" growth was seen, shares were not cheap, but shares certainly do not look compelling yet.

Quite frankly, shares are even holding up quite well given the true extent of the profit warning. This makes me very cautious about Mobileye Global Inc., despite the big pullback seen, so it is too early to get involved here with the shares.

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