Developers are tackling the the technological challenges of autonomous driving through the use of sensors and imaging devices such as radar, lidar (lasers) and cameras. Although automakers are in the early innings of developing self driving cars, Mobileye appears to have trumped the competition because camera based systems have the scientific advantage at this juncture. At least this is my interpretation of Mobileye management's take on it.
There's been much speculation on the Internet the last year about driverless automobiles. Google (GOOG) has received most of the press, but now Apple (AAPL) and General Motors (GM) are coming into the conversation. Although all three of these organizations may take part in the autonomous driving mix somewhere down the line, it's Mobileye that's the pure-play in the field. What does Mobileye do with your car? Here is the layman's description of the company as stated by COO Yonah Lloyd in the Q2 2014 Conference Call:
Much like the human eye, the Mobileye Solutions performs driver seen interpretation, detecting and classifying different objects in the road including vehicles, pedestrians, traffic signs and more. The systems capabilities range from providing lane departure warnings, forward collision warnings for vehicles and pedestrians, to more complex driving enhancement features such as autonomous emergency breaking.
Mobileye's client list is a literal Who's Who of car manufacturers with the exception of Toyota. The company's c-suite doesn't believe they can get Toyota into the fold until 2018, if indeed Toyota decides to become a customer. In addition, there is usually a five to seven year period when they are first introduced to a manufacturer until their product is included in serial production. So don't expect the number one automaker to add to Mobileye's top line anytime soon.
However, the company is in good shape with the current car manufacturers under contract. In 2016, there will be 244 car models utilizing EyeQ3 technology. Below are some specific applications of the Mobileye solution in today's world:
- In September, GM announced that it expects to release cars equipped with hands-free driving abilities on highways. GM is calling this feature the Super Cruise, which includes Mobileye technology, and it's expected to be available in 2016.
- Tesla announced plans to provide all of its Model S cars with full ADAS functionality, which also includes Mobileye camera technology.
- Mobileye is in the new Ford Mondeo sedan where their system can help determine if a person is crossing the road, and if needed can reduce the brakes up to full automatic stop. Ford expects the car to be available in Europe during 2015.
- The Audi Q7 will be showcasing Mobileye's most advanced capabilities. Specifically, the capacity to perform full breaking collision avoidance.
The corporation is not resting on past laurels. Mobileye maintains their cutting edge by by plowing a substantial portion of their revenues back into research and development. Approximately thirty-three percent in 2014. Commercial shipments for their next generation product EyeQ4 begin in 2018. Ten times faster than its predecessor, EyeQ4 will enable the use of seven cameras, which will help bridge the gap from semi-autonomous to autonomous driving. The chip is developed in collaboration with Mobileye partner STMicroelectronics (STM), as were previous generations.
As stated in the inaugural annual report, Mobileye management believes the total addressable market for camera-based ADAS systems for autonomous driving could reach $15 billion in the next several years. Management believes they will capture a substantial share of this market because of four reasons. One, long penetration cycles. Two, the data they have generated over the past 15 years allows them to optimize their proprietary algorithms. Three, they have the most advanced and most cost effective system in the market. Four, they have succeeded to lead in innovation, and bundle applications in one compact system.
Sounds great, but here's the rub. Hyperbolic headlines in the business press touting the wonders of self-driving cars may come to fruition, but not for another ten years according to CEO Ziv Aviram. It's a process that will come in increments. Although Mobileye is in the pole position with its SoC for automated driving, it has gotten way ahead of itself on a valuation basis. There's an old stock broker's mantra of "Sell the sizzle, not the steak.". Overzealous Wall Street pundits may be pushing up the price of Mobileye because it's the fair haired child of the semiconductor and automotive industries.
In this investing environment we are currently in, investors are paying up for growth. Especially freshly minted Initial Public Offerings. Mobileye had its IPO in July of last year, and it's been a thrill a minute ride for investors with the stock doubling in twelve months.
Nevertheless, the equity is very expensive if we utilize traditional valuation metrics. Forward P/E (for the full year 2016) is a whopping 85. This is based on the average analyst earnings estimate of $.71/share. Earnings growth is projected to grow in the 80% range for the next two years, which is why traders may have elevated the security in addition to the overall autonomous driving market hype. Price/sales doesn't get any better with the trailing twelve month figure at 84. As of June 30th, the short float was 13.2%, and may be higher because the stock has escalated.
Revenue guidance for full-year 2015 is only $217-$218 million, but Mobileye has a market cap of $13 billion. This is not an optical illusion. Although sales growth is a healthy 51% compared to 2014, the equity is way over its skis, ready for a tumble if it misses earnings estimates. The company doesn't give quarterly earnings projections, and has stated quarter-over-quarter results can fluctuate due to timing of orders, and the introduction of new vehicle models containing Mobileye products.
Although this is an exciting company, the time to buy Mobileye was four months ago when it traded in the $30 range. At $60/share, it's buyer beware. Patient investors may get a better entry point after the next conference call in early August. Better to let the day traders and momentum machines sell their shares to each other for the time being.