Shares of Mobileye (MBLY, Financial) have rallied considerably over the last few days. The stock jumped almost 10% yesterday after a Reuters article cited that major automakers will announce a pact to install auto-brake systems by 2022.
I am not sure if major automakers will use Mobileye’s products, but the one thing I do know is that Mobileye’s shares will be worth a lot less by that time. Mobileye may have an early mover's advantage into the autonomous driving space, but there’s no way the stock can justify its current valuation, which is why I think investors should short it after the recent rally.
Technology still years away
With annual sales of under $250 million, I find it hard to believe that Mobileye commands a market cap of almost $8 billion. To put into perspective, Mobileye’s P/S ratio is over 33! No matter how you look at it, the stock is grossly overvalued.
Overvaluation is not the only reason to short a stock, since companies can grow into the valuation. But there’s no way Mobileye can grow into its valuation as the technology is still years away. Even though Reuters claimed that automakers are planning to use the technology by 2022, that’s still six years away.
Given Mobileye’s almost flat sequential growth, there’s no way the stock can continue trading at its current valuation. Mobileye’s sequential growth has been almost flat. A stock with a P/E 127 and a P/S of 33 should report strong growth throughout the year; however, Mobileye’s growth has been very weak.
As I think the autonomous driving technology is still years away from becoming an everyday reality, I am quite confident that Mobileye’s valuation will come crashing down by then. For this reason, I think investors can short the stock with utmost poise.
Conclusion
While the Reuters article claims that many automakers will use Mobileye’s products by 2022, I wouldn’t be surprised to see it delayed. There’s no way to accurately predict an incident that is supposed to take place six years down the road, which is why I think investors should use the recent upsurge in Mobileye’s stock to short it.
The stock’s valuation is absurd and given the weak growth, I think investors can short without worrying about making losses. My current price target for Mobileye is $15, which represents about 60% downside potential from the current level.
