Mobileye (MBLY, Financial) has had a very volatile year. The stock is down marginally year to date, but it has more downside to offer and will continue crashing in 2016. The company is trading at extremely lofty multiples, and, given the valuation, investors should short the stock going into 2016.
Mobileye is an Israel-based company that, together with its subsidiaries, designs and develops software and related technologies for camera-based advanced driver assistance systems, or ADAS. Given the hype surrounding driverless cars, shares of Mobileye have surged to an unjustifiable valuation.
While I’m not denying the potential of driverless cars and the ADAS market, Mobileye valuation is built on hype simply because of the fact that the company has made no significant progress in the market. Despite being actively present in the market for 12 years, Mobileye has not filed any significant patents that will help it get the competitive edge over its peers.
The competition in the market is increasing as many companies across the world are trying to gain the upper hand. Ford (F, Financial) and Google (GOOG, Financial) recently paired up to develop driverless cars.
Moreover, Mobileye’s research and development expenditure is also lower, and it will make it difficult for the company to justify its current valuation. The likes of Google and Ford can afford to spend a lot more than Mobileye on R&D.
Clearly, the competition is heating up, and Mobileye hasn’t done anything to justify its present valuation. The company is trading at a P/E ratio of nearly 260 while its P/S ratio stands at 41. No matter how you look at it, the stock is too expensive, and the upside is limited.
The stock has a lot of room to fall, and the risks involved in shorting the stock are much less. Given the favorable risk/reward ratio, Mobileye is a great short.
Conclusion
The hype surrounding the driverless car concept has pushed Mobileye’s stock to a valuation that is too high to be justified. The concept is still in its early stages of development and is probably a decade away from being functional, and there’s a high chance of Mobileye’s shares falling considerably in the meantime.
In addition, given the increasing competition and the fact that Mobileye has no early movers advantage, it will be impossible for the company to grow into its present valuation. The stock has about 50% downside potential, making it a good short candidate.
