Israeli advanced driving assistance systems (ADAS) company Mobileye Global Inc. (Nasdaq: MBLY) sustained major damage yesterday and recorded the "worst day in its history" as its share price fell 24.55% to $29.97, following a profit warning. The Israeli advanced driving assistance systems (ADAS) company, led by CEO Prof. Amnon Shashua - the most valuable Israeli company - is expected to recover but it will take time. The main question that investors are asking themselves is how long it will take for the company to recover and the answer is what investors are trying to price into the company's stock.
Mobileye, a subsidiary of Intel (88%), published a profit warning and reported that excess inventory at its Tier 1 customers. These customers supply the world's vehicle manufacturers, who had previously decided to increase demand, as a conclusion drawn from the supply chain crisis, to avoid future shortfalls in inventory. It is most surprising that a large company like Mobileye had not identified over the past year the slowdown in demand for products and had not prepared for this. Last April Mobileye did speak about problems in cancelled subsidies and a fall in performance in China, but we are now talking about a more complicated scenario.
Mobileye estimates that the number of basic EyeQ chips already provided to customers is between six and seven million, meaning they will be ordering less in the near future. As a result the company sees first quarter 2024 revenue down 50% from the first quarter of 2023.
So in the flash of an eye, Mobileye has been transformed from "the fastest growing Intel division," to a shrinking division, at least for the time being. Mobileye has grown over the past few years at an amazing pace of 35%-45% per year and was worth 25% of all of Intel. It now seems this growth has been halted with a shriek of the brakes, with just 11% revenue growth in 2023, compared with 2022, and 2024 is forecast to show a 9% contraction in revenue - a fall of $20 million and 27% below the analysts' predictions.
Will the stock recover?
Despite everything there is a cautious optimism among investors, who see Mobileye starting to recover later in the year with double-digit growth. Over the coming year, Mobileye expects to sell 31-33 million units of EyeQ systems, compared with 37 million in 2023, as well as a rise to 175 million advanced SuperVision systems, although these are meanwhile far less profitable.
Investors are hanging on to Mobileye's optimism and hoping that the current situation will not drag into the following quarters of the year. Yet there are good reasons to believe that the weakness may continue even after the first quarter, due to interest rates in the US remaining at a 22-year high and the reduction in the public's appetite to purchase new vehicles, while taking on expensive financing. The slowdown in sales is evident both in Israel and in the world, when in Israel, for example, car imports have fallen by dozens of percent.
Eventually Mobileye is expected to return to growth. In the long term, analysts believe that the driver assistance market in which it operates is still in its infancy and is expected to continue growing rapidly in the coming years. Mobileye's rivals have been able to narrow the gaps but analysts are giving the company valuations that are much more generous than the current share price.
According to Yahoo Finance, out of 24 analysts who covered the stock last December, 20 analysts (83%) gave it a buy recommendation, including five with a strong buy recommendation. Only four analysts gave the stock a 'hold' recommendation, and none of them spoke of selling. The price target was $48.5 per share, compared with the current share price of $29.97, an upside of 63%. While it's entirely likely that analysts will now cut forecasts, this is a directional call. In other words, if the current background noise is ignored, Mobileye's stock, in the space of more than a year, is expected to recover significantly.
All this aside Mobileye's market cap fell yesterday to $23.9 billion. Still well above the IPO valuation of $16.7 billion but far from the $50 billion valuation Intel has once aimed for. The analysts' most recent forecasts predicted a market cap of $39 billion for Mobileye.
The bottom line is to assume that this is just another bump in the road for Mobileye and it will eventually resume growth. The targets set by Shashua will probably be delayed. He aims for an order backlog of $21 billion in 2030 while a year ago Mobileye's backlog grew to $6.7 billion, so the dream is still possible, and with it the growth of the company and the stock. When the situation calms down and the future becomes clearer, it is likely that the stock will already be in a different place.
Published by Globes, Israel business news - en.globes.co.il - on January 5, 2024.
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