Mobileye – No go

Inventory correction is in full swing.

• Weak numbers from Texas Instruments echo what Mobileye highlighted a few weeks ago underlining that industrial semiconductors are now enduring the same correction that consumer did just one year ago.
• Texas Instruments reported weak results and declined to say when it thought that the current weakness would be over stating that it had never seen a situation where different sectors behaved completely differently.
• Q4 2024 revenues / EPS were $4.08bn (down 13% YoY) / $1.49 which is behind estimates at $4.13bn / $1.47 but it was the uncertainty that really made the market unhappy.
• While the industrial sector has been weak for a few quarters, automotive has only just started declining while consumer has already had its correction and is now stabilising.
• Usually, these corrections tend to happen more or less together marking a departure from history which will make prediction all the more difficult.
• This is broadly in line with Mobileye’s warning a few weeks ago where it warned that a 6m – 7m unit inventory overhang would cause 2024 to be a very difficult year from a revenue perspective.
• Mobileye blames this on over-ordering in 2021 to avoid potential component shortages given the supply concerns that existed at the time.
• This correction is expected to last all year and reduce 2024 revenues to $1.9bn way below estimates of $2.6bn and follows on from Analog Devices which described a similar problem in November 2023.
• Consequently, I don’t think that this is a result of competition, but it is precisely as Mobileye says, an inventory correction.
• The competition has yet to really surface in the numbers as, despite several high-profile wins by Qualcomm in both digital cockpit and ADAS, these new platforms have not yet materialised in vehicles.
• This is due to the 5-year design cycle of a vehicle where decisions taken take a long time to materialise into unit shipments for suppliers.
• The writing is on the wall in that Mobileye is likely to lose a meaningful amount of market share in silicon chips in 2025 and 2026 when Qualcomm’s design wins make it into production but estimates for the company assume a return to growth.
• There is little doubt in my mind that the silicon content of vehicles is growing extremely quickly but I have doubts whether it is growing fast enough for Mobileye to endure market share losses and still make the consensus estimates.
• The other problem is the valuation in that even after the recent correction the company still has an EV of around $22bn.
• This is more than 10x 2024 revenues and around 8x 2025 revenues making a recovery more than priced in when one compares it to its competitors.
• Hence, I think that there is further to go and so would not be tempted to pick it up at this level particularly as the recovery that consensus predicts is far from assured.
• Instead, I own a position in Qualcomm which has recovered extremely well thanks to the end of the smartphone inventory correction leaving me wondering whether or not I should take my money off the table.
• Qualcomm is trading at 16.0x 2024 PER and 14.0x 2025 but I think that there may well be upside to the 2025 EPS estimate of $10.73.
• Consequently, while the shares are not the screaming buy that they were at 11.0x PER, the valuation remains unchallenging relative to its peers and I think that there is upside from automotive, Apple and potentially laptops that the market has not factored in.
• Hence, I am staying in and this remains one of the best ways to play the digitisation and automation of the vehicle theme.