Mobileye (MBLY, Financial) has continued to defy all valuation-based bears and has moved higher over the past few weeks. While I still like the company’s business, I would suggest investors to wait for a better entry point due the stock’s high valuation.
Currently, Mobileye is trading at 130x trailing earnings and 35 times trailing sales. It will take a lot of time for the company to grow into this valuation. Irrespective of the valuation, I think the company should perform well as a business going forward.
Performing Well
Mobileye has displayed stunning growth, together with constant sales and earnings growth, which is not anticipated to decrease radically from year to year. The company is the only autonomous driving pure play in the market, as it manufactures advanced driver assistance systems as well as automotive chips for almost 90% of prominent auto manufacturers around the globe.
The company’s strategy is to synchronize less expensive technologies such as cameras and radars, to steering and braking systems to aid cars judgement and prevent accidents. Furthermore, the latest automotive systems also permits the car to stay in a single lane for a semi-autonomous driving experience.
Gradually escalating demand for these systems supported the company to share 68% sales growth in 2015. On the other hand, consensus predicts that growth to endure with 44% for full year 2016 and 43% growth in 2017. The company is profitable by both GAAP as well as non-GAAP measures, but consensus usually refer to its non-GAAP earnings in their growth predictions.
However, it might be possible that the company can face escalating competition from tech giant NVIDIA (NVDA, Financial), and Tesla’s (TSLA, Financial) decision to move away from using the company’s chips could create a bad impression on its reputation between other auto manufacturers.
A New Deal
Recently, Mobileye detailed that it is going to partner with Delphi Automotive (DLPH, Financial) to make a turnkey self-driving system available to mostly all auto manufacturers starting in 2019.
Both the companies together want to develop a new innovative system known as Central Sensing Localization and Planning (CSLP) platform. This new platform will fundamentally be a specified computer that can perform as the brain of a vehicle, along with a self-driving system. The system will make use of the input gathered from several types of sensors.
However, this is not a new relationship, as both companies have been working together on driver-assist systems for almost 15 years. Both are extremely well-positioned to bring an efficient and reliable Level 4 self-driving system to the automotive industry.
Conclusion
While Mobileye’s growth will be strong over the coming years, I think investors should wait for a better entry point due to its valuation. Considering the increasing competition, Mobileye should retract in the months to come.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
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