Mobileye
N.V. (MBLY, $28.70): A More Modest Take on Future Alpha
By:
John Grant, AIM Student at Marquette University
Disclosure:
The AIM International Equity Fund currently holds this position. This article
was written by myself, and it expresses my own opinions. I am not receiving
compensation for it and I have no business relationship with any company whose
stock is mentioned in this article.
Summary
·
Mobileye
N.V. (NYSE: MBLY) designs and develops software and related
technologies for camera-based advanced drives assistance systems (ADAS) for
major motor vehicle corporations in North American, European, Middle Eastern
and Asian countries.
·
The stock has been on the decline since $61 peak
in 7/2015, revenue guidance for 2016 fell below consensus (40% y/y growth, $335M)
·
Big announcement at CES, Road Experience
Management (REM) solution minimizes costs, improve revenue guidance.
·
Auto suppliers are becoming increasingly cheap
and have positive earnings outlook, FY16 launches appear attractive as MBLY
adds to their backorder.
·
Legal momentum to speed up the integration of
ADAS in Europe, Americas and Asian countries.
Key
Points:
As MBLY’s stock price continues to slide (-36.95% 3-month
change) institutional investors are taking advantage of the underpriced
security. Of the six largest institutional holders, Fidelity Management &
Research Co. was the only one to shed a portion of its position, the other five
have exponentially increased their exposure to MBLY (Figure 3). MBLY continues
to hold a leading position in the ADAS market as they expand their data
collection, maintain a 100% RFQ success rate and legal tailwinds become more relevant.
In January 2016 MBLY made a presentation at CES
introducing their Road Experience Management (REM). The system uses advanced
artificial intelligence to create maps based on local coordinate systems, the
program requires a very low bandwidth. This low bandwidth and ease of
integration to their other systems makes MBLY’s REM the best product when observing
cost and performance.
MBLY has already begun efforts with General Motors to
integrate REM into existing program launches, the relationship with GM has been
growing significantly. On January 5th, 2016, MBLY announced they had
signed a Memorandum of Understanding with Volkswagen and further announced a
strategic partnership to implement the REM into VW’s vehicles. MBLY has
identified a third OEM customer, of comparable size to GM and VW, will be
announced in 2016. By announcing REM and the partnerships already established,
MBLY is further increasing barriers to entry for competitors.
MBLY continues to win every RFQ which it participates in,
adding VW as a customer will be a catalyst for future ADAS integration and
revenue growth. Management indicated the firm has added a high volume of new
launches for the back end of FY16, including five programs and 52 vehicles. The
Detroit Auto Show gives investors’ confidence there will be a higher volume of
new vehicle launches in 2016, an opportunity for organic revenue to increase in
2016.
Legal tailwinds remain favorable as government bodies in
Europe (30.2% of total revenues), Americas (55%) and Asia (5.8%) continue to require
ADAS and other safety technologies in vehicles. Driver error accounts for 80%
of all fatal car accidents, which are expected to be the fifth leading cause of
death by 2030. ADAS technologies have been proven to reduce collisions. OEM’s
will be required to have at least one ADAS in their vehicle to meet a 5-star
rating by the end of 2016. Additionally, AEB’s (MBLY specialty) are going to receive a higher weighting in an overall score on safety
ratings, making the MBLY product more in demand. NHTSA has ADAS’ on their list
of recommended technologies and are continuing to make a push on adding it to the
required list to meet a 5-star safety rating in the USA. Lastly, the China NCAP
expects ADAS to become a criteria of their 5-star safety rating by 2018 year
end.
Figure 1
Source: FactSet
What
has the stock done recently?
MBLY has had a tough run recently with the 3 month stock
price change at -36.95% versus -32.12% YTD (Figures 1 & 2). This largely is
attributed to their downward revenue revisions and investor focus on near-term
profitability. MBLY has a 52 week beta of 1.32 and it has become common to see
4-6% price fluctuations on a given day. Analysts have begun slashing
unrealistic 12-month price targets, which has caused heighted negative
perception towards the stock. However, increasing revenues, earnings and free
cash flow have depressed price multiples from a historic perspective and make
MBLY an attractive long-term investment at this time.
Figure 2
Source: FactSet
My
Takeaway
I am still bullish on MBLY,
however I would only recommend the stock to investors with a long term holding
period. MBLY continues to reiterate the growing demand for ADAS products
through their contract wins (100% success rate) and legal tailwinds in regions of
major revenue exposure. MBLY’s dominant market share and unique business model
as a third tier supplier will allow for them to dramatically increase
production to realize meaningful revenues and earnings in the coming years.
MBLY is attractively priced at $28.70 (2/1/16 close) with a P/E (NTM) 38.6x vs.
91.1 5-year average and a P/S of 32.8x vs. 66.9x 5-year average. I believe MBLY
will remain fairly volatile until more reported product launches between the
end of 2016 and 2018 begin to hit the market and the firm recognizes meaningful
revenues and earnings.
Figure 3
Source: FactSet
