Advanced Driver Assistance Systems (ADAS) may be one of the hottest products in automotive today. ADAS are combinations of hardware and software that warn drivers of hazards and danger and even take over if the driver fails to act. Ads show cars that see objects behind the car like little kids chasing balls and they stop before an accident happens. We also see a mom turning to look at her child in the rear seat, doesn’t see a stopped truck in front of her and the car brakes by itself. These scenarios are courtesy of ADAS.
Mobileye has a narrow niche in providing programmed chips for monocular camera systems. They program only for monocular cameras developing software for chips they buy from STMicroelectronics. STMicroelectronics designs, develops, manufactures, and markets semiconductor integrated circuits, silicon chips and smartcards. As an aside, STM has seen significant declines in revenue and cash flow and has had negative earnings in 5 of the past 8 years. Revenue has declined 20% in the same period. It’s still solvent and if they do go under MBLY can get chips elsewhere. MBLY applies their software algorithms to the chips and those go into the camera systems. MBLY has nothing to do with either cameras or chip manufacture.
ADAS systems can be radar, laser or camera. So far monocular camera is the lower cost alternative and it has superior performance over stereo over a range of applications. Cameras can be monocular or stereo and Mobileye is a monocular system. Compared to radar, stereo, laser and combinations of camera and laser/radar, monocular outperforms in accuracy, ease of installation and price.
From the CEO regarding the monocular approach
Some of our competitors took a different approach. We took approach of mono-camera, but our competitors took approach of stereo set, and many of them combining radar to the stereo set.
And some of the competitors provide stereo with leader. And one of the competitors provides a mono for just lane departure warnings and leader. They do combination of other sensors with their stereo set to overcome the disadvantage of stereo which out of the disadvantage is shorter distance that the stereo can detect. And we’re the only supplier to them that’s capable to provide the full suite of applications in one unit, in one camera and the best performance
The proprietary software and EyeQ chips perform detailed interpretations of the visual field that do the following:
MBLY’s safety features
- Lane detection
- Lane Departure Warning
- Lane Keeping and Support
- Vehicle detection
- Forward Collision Warning
- Headway Monitoring and Warning
- Adaptive Cruise Control
- Traffic Jam Assistant
- Emergency Braking
- Pedestrian Detection
- Pedestrian Collision Warning
- Pedestrian Emergency Braking
Driver Enhancement Features
Traffic Sign Recognition
Intelligent High Beam Control
Speed Limit Indicator
Features Under Development
- No-Entry Sign Detection
- New Traffic Signs
- Animal Detection
- General Object Detection
- Traffic Light Detection
- Hazard Detection
- Emergency Steering
- Autonomous Driving features
MBLY technology was first included in serial models in 2007 and is currently in around 3.3 million vehicles worldwide. Another way to think about it is MBLY has only sold product (through car sales) to 3.3 million users. That’s a very small number and just the beginning of the growth curve.
The market isn’t infinite but there will be a strong push to get some form of ADAS in new cars.
From the CC
I think the biggest push production will come from regulators and it’s already started, so we are behind the curve at least in Europe. We believe that in a year or two also United States will come up with if not the same but similar regulation. They gave already name to this NHTSA administration is responsible for it; they called CIB which is completion imminent braking and rest of the world will follow. We hear the same trend in Japan, we hear it in China, Australia started already in Korea we hear the same. So, it’s just a matter of time that most of the safety ratings regulations will follow similar regulation and this is the biggest push in order to have ADAS system in the car.
This is one of the biggest potentials of Mobileye today because we are in a very good position to benefit the majority of this growth. And I think any area that regulation starts, it will take from three to five years until at least 80% of the cars will be installed with at least one system. It’s a very rapid trajectory of our sales. And this is the biggest push to this kind of system but as I said once the system is within the curve the automaker has huge motivation to get additional benefits from the fact that the system is already there. They paid to us almost the same price for the unit and they can sell additional options to their customers.
Goldman Sachs gets out the crystal ball
In 2013, vehicle production was 84 million and that is expected to be 107 million in six years. That’s only 27% growth in for six years and if Mobileye was growing at that pace it wouldn’t be selling at a PE of 500x today. What the market is pricing in is deeper penetrance of the MBLY chips and software from a mere 1.5% in 2013 to a much bigger percentage in six years as they are a first mover and superior monocular system. MBLY sold 1.3 million units in 2013 for a market share of 66% and penetration of 1.5%. Goldman Sachs estimates they will sell 15 million units in 2020, market share will be maintained and penetrance will be 15% as more cars are equipped with ADAS. They guess that 20% of all production will have front facing cameras.
The penetration seems low because this is monocular cameras only and total ADAS includes stereo, laser and radar in addition to mono camera. Total ADAS penetration in new cars is likely to be much higher and if mono exceeds expectations, then their 15% could be much higher also. It’s not something I think anyone can know and make firm projections for that far ahead in a nascent industry. It’s a story that will continue to evolve and Mobileye will undergo changes along with the evolution. Right now the price is optimistic for GS projections. Should things move towards their mono specialty as a greater percentage of ADAS than it currently is, the current price could be ridiculously low depending on the magnitude of the moves.
Additionally, it’s not out of the question that Mobileye could adapt their technology to move into other ADAS systems.
2013 2014 2015 2016 2017 2018 2019 2020 ============================================================== Vehicle prod 84.0 87.6 92.7 97.3 101.1 102.8 104.9 107.0 Monocular ADAS 2.0 3.6 5.7 7.8 11.9 15.1 19.1 22.8 Penetration 2.0% 4.0% 6.0% 8.0% 12.0% 15.0% 18.0% 21.0% Mobileye share 66.0% 69.0% 71.0% 76.0% 72.0% 70.0% 68.0% 65.0% Mobileye units 1.3 2.4 4.1 5.9 8.6 10.5 13.0 14.9
The estimates are for 60 million Mobileye chips/units total sold over seven years 2014-2020. ASP is around $45 average (last Q) and over that period MBLY will make $2.7 billion just in the ADAS chip/software. The will also see aftermarket revenue (tiny at present) and hardware revenue. Goldman’s estimates would come in at $3.1 billion in revenue over 7 years. By 2020, revenue for the year is estimated at $770 up from $84 million in 2013. That’s growth of 820-fold for the period.
I include this not to steal from GS but to illustrate just how hard it’s going to be to make any firm estimates of so many different growth cycles —- ADAS, monocular cameras, vehicles manufactured and Mobileye percentage of the market. Who really knows? Goldman Sachs has some credibility because their analysts have relationships with the companies that make the cars, the cameras and the software. They also underwrote the IPO and must know something about it so I would trust their evaluation of the business as it stands today. The report is available online. I don’t have any industry contacts or insights so my estimates would mean zero and I won’t make any. Just for fun I took the GS revenue in 2020 and applied the highest net margins achieved in 2013 (using the company estimated 10% tax rate) and came up with a seven-year forward PE of 68x priced in today’s share price for the estimated growth.
Some recent numbers and Q2
Growth 2013 2012 =================================== Revenue 101.7% 110.2% Gross 114.2% 128.1% Operating 1020.0% 86.0% Net 37684.9% 99.6% Margins 2013 2012. 2011 ============================================ Gross 74.0% 69.7% 64.2% Operating 18.7% -4.1% -61.4% Net 24.5% -0.1% -69.8% ============================================ R&D/revenue 27.5% 39.4% 80.2% Marketing/revenue 15.2% 16.0% 32.0% Admin/revenue 12.6% 18.4% 13.4%
The superlative growth is the story behind the price per share. The market loves a growth story that delivers what it’s supposed to….… growth. Additionally, we can see the trend of margin expansion happening just as the company’s comments on high scalability anticipate. They were absolutely correct. All operating expenses are moderating as a percentage of revenue as costs don’t move in tandem with revenue increases at this stage of development—they decline (the exception is options).
Quarterly and six months
Q1 Growth 6 mos 2014 3 mos 2014 ========================================================= Revenue 135.8% 90.6% Gross 139.6% 90.8% Operating -2714.8% -2.3% Net -1429.4% -95.3% 6 mos 6 mos Q2 Q2 2014 2013 2014 2013 ===================================================== Gross 74.9% 73.7% 74.5% 74.5% Operating -17.1% 1.5% 10.8% 21.0% Net -28.0% 5.0% 0.6% 22.8% R&D/revenue 24.2% 32.7% 24.3% 28.3% Marketing/revenue 7.9% 24.5% 7.8% 13.2% Admin/revenue 59.9% 15.0% 31.7% 11.9%
For 2014, we see a return to negative growth and margins for operating income and net. This was due to a huge options expense that is included in administrative. As we might remember from the Container Store IPO, one advantage of going public is the ability to pass out options as salary and bonuses and create a way to pay people without the cash expense. It’s a big incentive to IPO. The company says the shares will run at around a 2% increase per year from options.
The only way to get at the “real” growth and margins is to exclude options which the company does for us in the call. Filings are pretty scant at this point.
On a non-GAAP basis excluding share based compensation total gross margin were 74.6% up slightly from 74.5% last year. The increase in gross margin is primarily due to the higher average selling price.
Non-GAAP operating expenses excluding share-based compensation increased to $10.5 million compared to $7 million during the second quarter of 2013. This increase was from investment in research.
Non-GAAP operating margin increased to 43% in the second quarter of 2014 from 35% in the same quarter of last year. Non-GAAP net income increased 73% year-over-year to $11.2 million and was at the high end of the range provided in the IPO prospectus. Non-GAAP EPS was $0.05 per share compared to non-GAAP net income of $6.4 million or $0.03 per share in Q2 2013.
I’m not a big fan of non-GAAP profit and loss manipulation but in this case with a short history available due to its 2-month old status as a public company, it does provide some perspective on growth.
The cash flow statement is always a better place for looking at actual cash based numbers.
In Q2 MBLY saw $23.4 million in cash from operations and $20 million in free cash flow (excludes capital expenditures) compared to $4.7 million and $3.4 million respectively in the second quarter of 2013.In 2013 they were cash flow positive for the first time in the short history we have that goes back to 2011. In 2013 CFFO was $28 million and free cash flow was $25.6 million.
High cash flow comes from minimal capex and manufacturing requirements. This is the very model of an asset-lite company with small reinvestment needs. That also makes the MBLY business highly scalable with the considerable portion of future growth turning into cash rather than being consumed by investment in PP&E and stockpiling IPW on inventory.
For 2014 they estimate total revenues will be in the range of $133 million to $135 million that suggests an annual growth rate of approximately 65% that is at the midpoint of their range. The 2014 non-GAAP net income will range from $41.7 million to $42.3 million, and approximately $0.19 per share based on 219.3 million weighted average diluted shares up from 205 million at the end of 2013—options dilution in part accounts for the increase. This also assumes a full year effective tax rate of approximately 20% expected to drop to 10% going forward.
Plans for the EyeQ chip and its track record
Each new generation of the EyeQ chip is many times faster than its predecessor, allowing for more and better image analysis. EyeQ2 was approximately six times faster than the original EyeQ; EyeQ3, launched in vehicles in 2015, is approximately eight times faster than EyeQ2. Mobileye is in the process of designing EyeQ4, launch date in 2018.
A true growth story in a growth industry
In order to be awarded a four-star or five-star safety rating, MBLY believes a vehicle will need to be equipped with camera-based ADAS. OEMs have been moving to adopt ADAS technology as standard equipment on the majority of new launches of existing models as well as of most new models.
Unfortunately they are now priced like a super-growth stock and any big moves up are going to come from the market getting giddier about their prospects and/or their potential market share and penetration. It’s also entirely possible MBLY will race by expectations by a wide margin and sort of grow into the price. Either is likely to happen. As always I would like to see the price far lower before buying.
Other analyst estimates
• Goldman likes them at $47
• Citigroup‘s Itay Michaeli starts the stock at Buy with a $48 price target, writing that “Mobileye is at the center of arguably the most powerful automotive megatrend in history—active safety (ADAS) and autonomous mobility.”
• R.W. Baird’s David Leiker, however, starts the stock with a Neutral rating, writing that “We believe the growth opportunity and profitability are very attractive; however, we are concerned with valuation and what seem to be overly aggressive expectations.” we are using a 45x P/E multiple on our 2018 EPS estimates, with market capitalization discounted by 20% to arrive at a 12-month price target of $42; a 10% discount rate would push the target price above $50.
• Deutsche pulls its Buy rating, citing valuation following the big post-IPO rally. The $53 price target remains.
• Morgan Stanley’s Ravi Shanker boosts his price target on Mobileye (NYSE:MBLY) to $65 from $46, with a bull case price target of $120
• Barclays one-ups Morgan Stanley. Echoes of 2000? Two days after Morgan Stanley offered a $100/share bull case for Mobileye Barclays is out with a $150/share bull case
• Dougherty has launched coverage on Mobileye with a Buy and $45 target.