Mobileye IPO – Tough sell.

Intel is a committed seller.

• Mobileye has filed its S-1 with the SEC announcing its intention to relist but looking at how much growth has slowed and how low its margins are, indicates that even the reduced valuation of $30bn is going to be a stretch.
• Mobileye started life as a chip company selling camera-based ADAS systems to the automobile industry.
• It quickly realised that machine vision is the biggest challenge for autonomous driving and so its future products are solutions for Robotaxis and fleet-owned vehicle networks.
• These more advanced products migrate from cameras to using a full suite of sensors (including lidars) as well as a lot more of Mobileye’s silicon chips.
• Historically, Mobileye has been extremely successful and as a result of having the best product, it has managed to win around 80% of the ADAS market which is how it was able to report over $1.3bn in revenues in 2021.
• Mobileye’s ADAS is designed into 800 vehicle models, and it can count 50 OEMs as customers almost entirely because to date, it has had the best product.
• This success led Intel to acquire Mobileye in 2017 for $15.3bn which was part of Intel’s investment strategy to ensure that it would never miss a trend like mobile again.
• However, events have overcome Intel and its problems with its 10nm and 7nm processes allowed TSMC and Samsung to overtake it in terms of manufacturing prowess and Nvidia to take its crown as the largest semiconductor by market capitalisation.
• Under its new CEO, Pat Gelsinger, the focus is back on manufacturing and given how successful Mobileye has been and how much money Intel needs to spend, the time is right to monetise this investment.
• The problem is that the market is not behaving and until the Fed pivots and gives up on its fight against inflation (as the Bank of England has done), then valuations are likely to continue going lower.
• The original ask for Mobileye was forecast to be around $50bn but with market conditions, this now appears to be around $30bn.
• Unfortunately, this also looks to be too high raising the possibility that the price is cut further, or the IPO is delayed.
• In 2021, Mobileye grew revenues by 43% YoY but in the first 6 months of FY2022, growth had slowed to 21% YoY which is not ideal when a $30bn valuation equates to 18.3x FY2022 revenues.
• This would be justifiable if the company was generating huge profits which would give a lower PER ratio but in FY2021 the company lost $57m from operations which was repeated in the first 6 months of FY2022 with a $36m operating loss.
• The company has good gross margins of around 50% but all of this is being invested in R&D to develop the leading product in autonomous driving.
• This means to invest in the IPO, Mobileye has to sell investors on the idea that it has the best autonomous driving product and that it will be able to hold onto its 80% market share in ADAS.
• While I like Mobileye’s technology, there are plenty of credible competitors from whom vehicle makers and fleet owners could source their autonomous driving technology.
• Furthermore, there is now credible competition for its dominant ADAS product and Qualcomm is claiming to have a $30bn pipeline of design wins, the majority of which are in ADAS.
• Finally, Intel has substantial capital requirements given its push to reclaim its crown in semiconductor leading-edge manufacturing and I suspect it will be using its stake in Mobileye as a source of funds.
• Hence, I suspect the IPO goes ahead but I think that the street is not going to swallow the valuation meaning that another cut will be needed.
• Nvidia is still trading at around 10x 2022 EV / Revenues and this might be the benchmark against which the street is prepared to invest.
• This would give a valuation of somewhere around $17bn which is perilously close to the $15.3bn that Intel originally paid, meaning that this is going to be a very tricky IPO in this market.
• I don’t think that benchmarking Mobileye against the autonomous driving industry is going to help much as many of them went public via SPACs and are currently languishing at 60% – 80% less than the $10 launch price.
• Hence, In this market, I would steer well clear of this IPO as it is extremely unlikely to come to market at a price that a rational, value-based investor would find attractive.