Is Mobileye’s Slowing Growth a Buying Opportunity?
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“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” That’s what Warren Buffett said, a man who traditionally avoided tech stocks because he finds them difficult to understand. Today, we want to understand why Mobileye (MBLY) is expecting declining revenue growth next year and decide if this computer vision leader should ever find a place in our disruptive tech portfolio. While the valuation is starting to become more attractive, we need to be sure this is a great company, not a fair one.
The Autonomous Driving Thesis
“Investors can look to three areas of investment, including electrical and control systems and sensors; vehicle services; and infrastructure upgrades.” That’s according to a report by L.E.K. Consulting that estimates Level 5 autonomy – complete driverless capabilities – will finally start to emerge by 2035. In the meantime, the other four levels of driver assistance will be coming online in succession.
- Level 2 (today): control the vehicle’s steering and braking under certain conditions such as adaptive cruise control and lane-keeping assist systems.
- Level 3 (coming soon): allows the vehicle to control all aspects of driving under “certain conditions,” with a human standing by to intervene as needed
- Level 4 (by 2035): Same as above except “all conditions”
- Level 5 (???): No human needed – the Holy Grail
All the above levels require computer vision cameras, though for the advanced levels, more software and sophisticated technology will be needed to implement. Today, Mobileye’s bread and butter comes from selling 6th generation EyeQ™ System-on-Chips (SoCs) that enable the cameras needed for cars to “see.”
Mobileye generates the majority of revenues (89% last quarter) from the sale of EyeQ® SoCs to more than 50 large automotive manufacturers through sales to Tier 1 automotive suppliers. (More on this in a bit.) Around 29% of chips were shipped to China followed by the United States at 23%. During the first nine months of this year, they shipped 25.9 million units, and 90% of their $1.44 billion in revenues over the same time frame came from EyeQ chips. That translates to an average selling price (ASP) of around $55 per chip. External sources verify the cost of these chips are about $50, so why is the ASP we calculated higher? That’s because Mobileye is now selling SuperVision, what they describe as the ‘bridge’ to consumer AVs.
Mobileye’s SuperVision
With over a decade to wait until full autonomy, investors see Mobileye’s market leadership of 70% as evidence they’ll be able to sufficiently provide the necessary technological capabilities when the time comes. That’s what SuperVision represents – the technology needed for Level 3 autonomy. While 90% of their $1.44 billion revenues came from $50 chips, “the majority” of the remainder came from selling SuperVision, a packaged solution that uses 11 cameras, a radar-based system, and accompanying software that enables hands-free operation under certain conditions such as highway driving.
The system raises Mobileye’s content per car to $1,500 from $45 to $50, according to estimates from analysts at UBS. That’s according to a paywalled article by Automotive News which says that “Porsche is a SuperVision customer, as are Zeekr and Polestar, which are part of Chinese automaker Geely Automobile Holdings.” Around 100,000 vehicles have SuperVision technology which translates to $250 million in sales. Mobileye works with more than 50 of the largest automotive companies on this planet, and currently has EyeQ chips in over 160 million vehicles. We can therefore deduce a potential $400 billion opportunity as we start approaching full autonomy. And the size of that opportunity hasn’t gone unnoticed.
The Competition
The article goes on to say that three companies – Qualcomm, NVIDIA, and Mobileye – “are winning the lucrative battle for smart car tech supremacy.” Here’s their respective automotive revenues over the past five years.
NVIDIA is our largest position with “data center” revenues (a proxy for AI chips) accounting for 55% of total revenue last year with automotive at just 3%. Then there’s Qualcomm whose handset revenues account for 74% of total revenues last year with IoT at a distant second (20%) followed by Automotive (6%). (QCOM saw overall revenue growth decline 19% last year.) The obvious question would be why Qualcomm’s automotive revenues are nearly equal to Mobileye’s if the latter commands a 70% market share. That’s because Qualcomm addresses additional automotive use cases such as infotainment, connectivity, and telematics. All three companies seem to be making progress with major automakers with large pipelines of sales expected throughout the rest of this decade.
A year ago, Qualcomm touted $30 billion of forward contracts, a figure it hasn’t updated. In January, Mobileye said it had a $17 billion pipeline to 2030. NVIDIA said in September it has locked in $14 billion in automotive contracts over the next six years. The biggest slice of the pie is in advanced driver-assist systems.
Automotive News
The article goes on to talk about how Qualcomm and NVIDIA aren’t pitching themselves as a replacement for Mobileye, but rather “partners that supply the compute power and tools, while leaving the automaker in control of the final product.” It’s another reason why SuperVision adoption is a key measure of Mobileye’s progress, and we’re assuming their profitability will increase from the sales of a platform as opposed to the 49% gross margin they realize on $50 chipsets.
Let’s also remember that plenty of companies out there are trying to tackle self-driving using holistic technology platforms they’re either cobbling together or building. Waymo told CNBC they’re “well ahead of 10,000 trips […] every single week” in both San Francisco and Arizona with fully autonomous taxis taking Waymo riders on more than 700,000 trips in 2023. Meanwhile, Waymo’s neck-in-neck competitor Cruise has been running into regulatory problems and will receive “significantly less funding” from General Motors in 2024. That’s a good segue into talking about Mobileye’s own recent bad news.
Last Quarter’s Bad News
Mobileye’s preliminary 2023 results showed year-on-year revenue growth of 11%, but it’s the 2024 guidance that shocked investors. The company recently became aware of “excess inventory at our customers, which we believe to be 6-7 million units of EyeQ® SoCs.” Much of this excess inventory was said to be “decisions by Tier 1 customers to build inventory in the Basic ADAS category due to supply chain constraints in 2021 and 2022 and a desire to avoid part shortages, as well as lower than-expected production at certain OEM’s during 2023.” The press release contained very specific information about expected 2024 production numbers for which we’ve provided midpoint estimates below:
- 32 million EyeQ SoCs – $1,600 million
- 185,000 SuperVision systems – $277.5 million
Above we’ve assumed a $50 chip price on EyeQ and $1,500 price point for SuperVision. That sums to $1.88 billion which is very close to their 2024 revenue midpoint guidance of $1.89 billion. That’s a year-over-year decline of 9%, which is probably why the stock dropped 15% on the news. But is this problem temporary?
Let’s add the 6.5 million units of excess inventory to the 32 million units they plan to sell in 2024. That means their customers consumed 38.5 million EyeQ SoCs in 2024 compared to 37 million in 2023. That’s about 4% growth compared to about 85% growth for SuperVision units (remember, they sold 100,000 in 2023). So, if we pretend the inventory problem didn’t exist, then here’s how revenues would be expected to grow in 2024:
- 1.5 million extra EyeQ SoCs at $50: $75 million
- 85,000 extra SuperVision platforms at $1,500: $127.5 million
Without the inventory problems, Mobileye would have seen revenues grow about 10%. Not the best numbers, but still double-digit growth, and largely in line with last year’s growth of 11%. Of course, the numbers we’re using here all reflect guidance ranges for 2024, so we’ll need to wait and see what actually happens. Long story short, the inventory problems appear to be temporary, while the most important growth metric – SuperVision units sold – is showing extremely strong growth.
Some Additional Thoughts
Our previous piece – Should We Buy Shares of Mobileye Stock? – raised some reservations about the company including customer concentration risk (more on this in a bit) and nearly $11 billion in goodwill on their balance sheet. Today, we’ve looked at competitive pressures and pointed to a heavy reliance on China (a double-edged sword). We’re probably less concerned about the 2024 growth hiccup and more concerned about how long we need to wait before autonomy gets here. A lot can happen that could cause Mobileye to lose their leadership, but they are the undisputed leader presently.
McKinsey did a survey of industry decision-makers and found that “timelines for autonomous-vehicle development are extending” with 60% believing that regulatory hurdles will be the biggest impediment. Can America’s bickering political parties manage to pass the necessary legislation, or will China take the lead with decisive leadership as they have in electric vehicles? Not surprisingly, respondents were evenly split between believing China or North America would be first to see Level 4 autonomy. Perhaps Mobileye’s exposure to China represents more reward than risk. As for when autonomy will arrive, McKinsey’s estimates are more optimistic – Level 4 autonomous taxis and autonomous trucking by 2030.
One last thing to note. We’ve talked about customer concentration risk on numerous occasions, but we’re wondering if that’s a moot point. Just look at the following sentence taken from Mobileye’s recent 10-Q:
We generate the majority of our revenue from the sale of our EyeQ® SoCs to OEMs through sales to Tier 1 automotive suppliers.
Mobileye 10-Q
Perhaps the supplier is just a necessary intermediary. In other words, the supplier will always supply Mobileye equipment because that’s what the largest automotive companies in the world are asking for. There’s supplier concentration risk here, but not customer concentration risk. Given that Mobileye’s products are found in 800 automobile models it seems as if the end-customer concentration risk probably isn’t nothing like what we’re being told. We’d appreciate hearing some feedback on this from readers who might have further knowledge of these arrangements in the auto industry.
Conclusion
The key metric to watch right now would be sales of SuperVision which represents an era of autonomy as opposed to generic lane-changing cameras. Mobileye is being somewhat vague about the contribution of SuperVision revenues, so investors should pay close attention to this language. We’ll continue to wait for a simple valuation ratio target of nine, the same valuation as their IPO. If we decide to add shares at those levels, Nanalyze Premium subscribers will be the first to know via email alert.
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