Mobileye: Is Premium Valuation Justified? (NASDAQ:MBLY)

In the rapidly evolving automotive sector, characterized by the impending ubiquity of Advanced Driver Assistance Systems (ADAS) and Autonomous Vehicles (AVs), Mobileye (NASDAQ:MBLY) is one of the prominent players primed for substantial gains. As the industry steers toward a future where ADAS and AV technologies become standard in every automobile, Mobileye distinguishes itself through a myriad of strategic auto partnerships.

Mobileye’s valuation does appear steep, with a forward P/E ratio of about 42 based on 2024 projections. However, the company’s commitment to research and development, its debt-free financial position, and the significant potential for earnings growth might still render it an attractive investment for risk-tolerant investors.

Mobileye is well-positioned to gain from the forthcoming prevalence of AVs and ADAS

In the not-so-distant future, the automotive landscape is poised for a transformative shift. Advanced driver assistance systems and autonomous vehicles are rapidly advancing, and their prevalence on the roads is inevitable. Governments and regulators worldwide are recognizing the potential of these technologies to enhance road safety and reduce accidents. It’s not just a matter of choice; ADAS systems are increasingly likely to become a mandatory standard set by law.

For example, in the US, The National Highway Traffic Safety Administration (NHTSA) has put forth a proposal to standardize automatic emergency braking in passenger cars and light trucks. These proposed regulations are particularly centered around vision-based emergency braking systems, incorporating pedestrian identification features.

In the EU, several safety features have been mandatory in all new heavy-duty cars since 2022, and more will become mandatory over the next 5 years. Moreover, EU regulations go as far as mandating lane-keeping systems, emergency braking, and intelligent speed assistance in all new passenger cars, not only trucks and buses, by 2029.

From this perspective, it is evident that in the near future, the majority of vehicles on the roads will either be fully equipped with a range of ADAS technologies or be autonomous vehicles. The ADAS market was valued at $30.9 billion in 2022, and it is expected that, as governments introduce more regulations, the market will reach $65 billion by 2030, growing at a 9.7% CAGR. Mobileye is well-positioned to benefit from this trend due to its extensive list of partnerships.

Mobileye has partnerships with top automakers and emerging EV companies

Mobileye has strategically forged partnerships with a comprehensive array of automotive manufacturers, establishing a notable presence in the industry. These partnerships include a wide spectrum of automakers, ranging from traditional giants to emerging electric vehicle (EV) manufacturers.

Hence, such giants as Volkswagen (OTCPK:VWAGY), Ford (F), BMW (OTCPK:BMWYY) already have programs based on Mobileye’s mapping, ADAS, and AV tech. The largest automaker Toyota (TM) has also chosen Mobileye ADAS tech for multiple vehicle platforms. These companies alone accounted for about 24% of the global market share in 2022.

On a premium front, Mobileye is working with Porsche (OTCPK:POAHY) to integrate its SuperVision premium ADAS technology into upcoming Porsche models. Furthermore, in the world of emerging EV players, Mobileye has established partnerships with Nio (NIO) and Polestar (PSNY) to bring autonomous driving capabilities into their electric vehicles. Notably, Nio is already piloting AV programs in Germany, leveraging Mobileye’s technology.

With such a broad and diverse portfolio of partnerships, Mobileye has solidified its position as a key player in shaping the future of safe and autonomous driving, while also profiting from the increasing adoption of this technology.

Mobileye’s financial strategy and spend structure make it a safer stock

When it comes to financials, Mobileye’s strategy seems prudent and encouraging, reducing the financial risks for its investors.

A notable part of this strategy is the company’s allocation of expenses, with a primary focus on research and development (R&D), and even when the company generates negative operating income, most of the expenses are actually directed to R&D. For instance, in Q2 2023, Mobileye generated $224 million in gross profit while spending $211 million on R&D. Notably, in the first six months of 2023, Mobileye reduced its sales and marketing costs, compared to the same period last year, while still expanding its revenue.

By directing a significant portion of its investments towards R&D initiatives, Mobileye demonstrates its commitment to technological advancement and staying at the forefront of the autonomous driving industry. This strategic emphasis on R&D investment highlights Mobileye’s commitment to innovation and its readiness to invest in cutting-edge technology, even when immediate profitability is not guaranteed. Given that AV and ADAS technology are still in their relatively early stages, we can anticipate that the return on this investment will primarily materialize in the future.

Another noteworthy aspect of Mobileye’s financial standing is its safe balance sheet position. In Q2 2023, the company had approximately $1.14 billion in cash and no long-term debt, contributing to the company’s overall stability. Mobileye’s ability to fund its operations and growth initiatives without relying on excessive borrowing provides a sense of security to investors, especially in an industry characterized by substantial capital requirements. This prudent financial management makes the stock more resilient in the face of market fluctuations.

MBLY’s valuation is steep but might be suitable for high-risk investors

With regards to valuation, the stock is not exactly cheap. MBLY trades at an approximately 51 P/E ratio, based on EPS projections for 2023, and a 42 P/E for 2024 earnings, which is among the highest in the automotive industry. Moreover, MBLY’s P/S ratio is currently at about 14.3, which is high not only for the automotive industry but even for the technology sector.

However, some high-risk investors might still find the stock appealing for investment.

If we look at the company’s gross profit margin, MBLY clearly stands out among its peers from the automotive area with more than 49% gross margin. This distinction arises from Mobileye’s strong tech-oriented focus, aligning it more closely with industry giants like Nvidia (NVDA) rather than traditional automotive companies such as Magna (MGA) or Continental (OTCPK:CTTAY). In fact, it’s challenging to identify a direct competitor that aligns entirely with Mobileye’s niche.

Additionally, Mobileye will likely experience significant growth in the future, especially considering the advancements in ADAS and AVs discussed earlier. It is projected that next year, MBLY’s earnings will increase by about 22.5%, with an average 3-year earnings growth rate exceeding 43%. This implies that MBLY’s PEG ratio is close to 1, which is considered a “golden standard,” while many high-growth tech stocks trade around 1.5-2.

To sum up, Mobileye has significant prospects, and the valuation is not as crazy as it might seem from the first glance at the multiples. However, the stock offers no margin of safety, and Mobileye has little room for mistakes.

Key takeaway

Mobileye is poised to thrive in the evolving automotive landscape with the rise of ADAS tech and autonomous vehicles. The company’s technologies are integrated into vehicles produced by some of the most prominent names in the automotive sector, which means Mobileye is positioned well to profit from the future expansions in this area. With more governments making ADAS features mandatory and more automakers testing autonomous driving capabilities, the growth in Mobileye’s addressable market is all but guaranteed.

When it comes to financials, Mobileye’s prudent spending on R&D underscores its commitment to innovation. Additionally, its robust balance sheet, featuring approximately $1.14 billion in cash and no long-term debt, signifies financial stability, ensuring the company does not go out of business any time soon.

Despite the premium valuation, Mobileye’s potential for growth, strong gross profit margin, and position at the intersection of automotive and technology sectors might make it appealing for high-risk investors. However, the stock offers no margin of safety and is best suited for those who believe in the future of autonomous vehicles and car safety tech, and are comfortable with potential risks.