Our Take
ADAS/AV is, no doubt, a growing market, but it is still unclear what will be the extent of growth. The market will adjust its expectations regarding the adoption of autonomous vehicles. Mobileye (MBLY, Financial) does not hold the extensive IP portfolio to keep competition out of the market. Competition is intensifying amid the growth of ADAS/AV. The company is not keeping R&D up to speed. Despite this, the company is valued as a future leader in ADAS. Mobileye is a short-sell, as even the best case scenario does not divulge any upside.
About the Company
Mobileye N.V. is a technology company involved in the provision of computer vision, machine learning, data analysis and localization for ADAS and autonomous driving technology. The company basically develops ADAS technology system- on-chips including camera, radar and computer vision chips, to detect obstacles. The company is a vision algorithm pure-play for autonomous driving technology. Regarding products, the company provides EyeQ SoC and related software to the Tier 1 companies. The company sells its products to OEMs, primarily through its Tier 1 customers. Mobileye also provides aftermarket products including the 5-series product, which features Mobileye EyeQ SoC and related algorithms and software. So, basically, the company provides the chip for the enablement of ADAS and autonomous vehicle functionality.
Regarding revenue, sales to OEMs represented approximately 84%, 85% and 78% of the revenues for each of the years ended Dec. 31, 2015, 2014 and 2013, respectively. After market sales contributed 16%, 15% and 22% towards the revenue during each of these years. The company was founded in 1999 and is based in Jerusalem.
Industry Prospects
ADAS market is expected to grow in coming years, amid the increase in safety awareness and the growth of autonomous vehicles. There are numerous forecasts for the growth of ADAS but most of them are not comparable, given the segments of the market included in the forecasts are subject to the subjectivity of research firms.
IDC forecasts that the automotive semiconductor market is set to grow at a CAGR of 8% during 2015-2020, and ADAS will be the key driver for the growth. IHS, another research firm, estimates the ADAS chip market to grow to $2.6 billion by 2020, a fourfold increase since 2010.
However, note that the market is expected to grow at a CAGR of 11.6% during 2015-2020, according to this forecast. And, the forecast relates to the chip market, of which Mobileye is the primary provider of the SoCs for ADAS. The forecast is not so rosy for Mobileye given that analysts expect earnings to grow at around 48% p.a. during the next five years.
Statista’s forecast is also in single digits. They expect the market to grow at 6.4%, 7.5% and 8.6% during 2017, 2018 and 2019, respectively. Another report from marketsandmarkets mentions CAGR of 10.44% for the ADAS market during 2016-2021.
It is worth mentioning that 50.12 million units of vehicles equipped with ADAS are to be shipped in 2016. These shipments are expected to reach 60.52 million units by 2022, according to ResearchandMarkets. This translates to a CAGR of merely 3.19% in unit shipments.
However, Goldman Sachs expects the ADAS/AV vehicle market revenues to grow at CAGR of 42% during 2015-2020. ABI research agrees with Goldman, as they also expect the ADAS market to grow at CAGR of 42% during 2014-2020. The stark contrast in different ADAS forecasts is because of the segments of ADAS/AV included for the forecasts.
Further, Global automotive vision system market is expected to grow from $3.1 billion in 2015 to $6.1 billion in 2020, translating into a CAGR of around 14%. Note that Mobileye is a pure-play in vision algorithm. Therefore, this forecast is not good news for Mobileye given the growth expectations of the analysts.
Moreover, main-stream adoption of self-driving vehicles is still questionable. According to Gartner, autonomous vehicles are at the peak of the inflated expectation. Once the expectations come in-line with reality, Mobileye will be affected materially as most of the bull arguments are based on the main-stream adoption of autonomous vehicles.
Source: Gartner
Although Goldmansachs is bullish on the growth of ADAS/AV market, their survey tells a different story.
“Our survey of 2,000 consumers suggests there is quite a bit of skepticism with 49% of respondents not interested in AVs – rejection is much higher among 45+ year olds. This reinforces our view that social acceptance and regulation are the largest barriers to adoption and likely only fall into place after extensive validation and testing.”
Despite being bullish on Mobileye, Piper Jaffray’s Alexander Potter has following to say about the autonomous vehicle industry. Potter notes that a real self-driving car:
“probably won’t hit the road for at least a decade, given there are “psychological and regulatory barriers,” such as the fact “many consumers can’t stomach the idea of taking their hands off the steering wheel — never mind riding in a car with no steering wheel whatsoever.”
He goes on to mention the safety issue, arguing that unless there are some sophisticated testing measures, it is impossible to know for sure that automated vehicles are a safer option as compared to human controlled vehicles.
All in all, the market will adjust its expectations regarding the adoption of autonomous vehicles, which will impact the stock market performance of Mobileye. Most of the forecasts above mention CAGR in the range of 8% and 20%, with the exception of forecasts from ABI research and Goldman. ADAS/AV is, no doubt, a growing market but it’s still unclear what will be the extent of growth. Therefore, modeling high-end of forecasts to value Mobileye isn’t a good idea.
Other Red Flags
The problem is not only that some research firms are overestimating growth. Who’s to say that Mobileye will capture all that growth in case the best case mentioned by ABI and Goldmansachs pans out. There are several red flags for Mobileye, including a lack of substantial IP ownership for ADAS, intensifying competition amid low barriers to entry (think fabless businesses like Qualcomm), competition from the supply partners, low research and development, lofty valuation and heavy insider selling. Let’s look at each of the points in detail.
Mobileye doesn’t hold the ownership for IP portfolio to keep competition out of the market. Look at the search from a patent database below. Several search terms were used, but on no occasion was Mobileye dominating the patent ownership. When searched for “Advance driver assistance” Mobileye came in 6th while a know competitor, Continental, was fourth. See the graphs below. Note that when searched for autonomous car patents, Mobileye did not even show up in the top ten owners.
Source: Lens.org Search term, “Advance driver assistance”
Source: Lens.org Search term, “Advance driver assistance” camera
Source: Lens.org Search term: “autonomous cars”
The point is that without having extensive IP ownership, Mobileye will find it difficult to keep the competition away. And, competition is already heating up.
Competition is intensifying amid the growth of ADAS/AV. Because of lack of exclusive IP held by Mobileye, other companies are entering the market. Some of the competitors include Bosch, Continental, Delphi, Denso and Autoliv. Mobileye also has a problem in its supply chain; it supplies to OEMs through tier 1 clients. Some of the tier 1 clients are coming up with competing products. Continental and Denso are very quietly developing their own mono-camera capabilities to get a better part of this cost effective ADAS pie, notes Frost&Sullivan. They further add,
“Toyota for example right now uses Continental on its high end models (IR laser+mono-camera) and Denso on its lower end models (mono-camera+radar). And VW also uses a system from Continental that does not involve Mobileye. But rumors are afloat that both Toyota and VW are evaluating switching to Mobileye.”
Pacific Crest notes that,
“The auto supply chain structure may ultimately turn from being a positive to a negative for Mobileye. We believe these supplier partners have ample time to invest in similar technologies to bridge technology gaps.”
Note that Autoliv already announced the development of competing products. Mobileye itself notes in its SEC filings that,
“We face potential competition primarily from Tier 1 companies and potentially other technology companies. “
Moreover, OEMs generally do not want a single supplier to be dominating in order to retain bargaining power. Therefore, OEMs will welcome new players in the ADAS/AV arena.
The story is clear. Mobileye is going to face some serious competition going forward. The only thing that can allow Mobileye to remain a leader is more proprietary technology, but IP development requires R&D
R&D expenditure of Mobileye, as compared to other companies, is disappointing. According to PWC six of the top ten R&D companies in the world are automotive companies. And, most of them are already investing in ADAS. Being up against the giants of automotives will be a big challenge for Mobileye going forward. Further, Mobileye’s R&D-to-EV is merely 0.33% as compared to Denso’s R&D-to-EV of 8.9%; Denso is among the competitors of Mobileye. Holding back on R&D will not do any good to the company, and it is going to lose market share to the competitors.
Valuation is astronomical. It is difficult to justify Mobileye’s valuation. The company trades at a forward PE of 45. The forward P/S stands at 21.23 given that the company manages to post revenue growth of around 42% in 2017. Even if the company manages to post growth towards the high-end of the forecast, P/S of 21.23 cannot be justified.
The best case valuation assuming earnings growth of 40% p.a. during the next five years and 1% perpetual growth reveals a price target of $50. But, the chances of best case happening are remote as the company has to spend more on R&D if it wants to continue to dominate the industry. Increasing R&D will affect the EPS and 40% earnings growth will not be possible. And, if the company opts out of increasing the R&D, competition will steal the market share. In either case, the chances of a best case scenario are remote. Even if the best case pans out, it gives a price target of $50. See the valuation table below:
Focus Equity Estimates, click the image to enlarge
Verdict
The asymmetry of risk-reward due to dispersion of growth forecasts of advance driving assistance technology, or ADAS, increasing competition, low R&D investment by Mobileye and lofty valuation makes the company a candidate for a short-sell.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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