A Way to Profit From the 'Driverless Car' Hype

Investors shorting overvalued Mobileye can gain 50% profits

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Feb 05, 2016
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Toward the end of 2015, I recommended that investors short Mobileye (MBLY, Financial) stating that it could fall as much as 50% in 2016.

Since my recommendation, Mobileye has fallen roughly 37%. Although I am surprised to see the stock lose so much value so fast, investors should not hurry to cover their short positions as the stock still offers a lot more downside potential. In fact, I may have underestimated the company’s downside potential the last time around. Hence, investors who short Mobileye can still reap roughly 50% rewards.

Auto driving hype

The driverless car will be a reality in the future, but the technology is still one or two decades away from being practical. Currently, the technology has many flaws, and it will take years for it to evolve into a product that consumers can use on a daily basis.

As of now, Mobileye is one of the few pure play companies that investors can buy to benefit from driverless cars. However, given the stock’s valuation and the company’s weak business model, investors should avoid the stock.

Despite the 37% dip, Mobileye is currently trading at 68x trailing earnings. Given the recent bearish market sentiment, it is unlikely that Mobileye can sustain this valuation for a long time. Clearly, the stock price indicates that investors expect the driverless car to become a reality in the next few years, but that is not the case.

At a P/E ratio of 68, Mobileye’s earnings and revenues are expected to continue growing at double-digit speed heading forward. However, the entire market is not likely to grow at such a rapid speed in the near future, which makes it highly unlikely that Mobileye can sustain its recent valuation. The company’s revenue growth will soon slow down, and the stock will definitely plummet below $15.

Conclusion

Hyped companies have performed terribly this year as the likes of GoPro (GPRO, Financial) and Fitbit (FIT, Financial) are down considerably. The “driverless car” hype has pushed Mobileye’s valuation to a monumental level, and it is impossible for the company to sustain its current metrics. Reality will soon catch up with investors, and the stock will fall below $15 this year. Amid the bearish market sentiment, Mobileye shorts can still reap 50% rewards.