Mobileye (MBLY), which develops so-called Advanced Driver Assistance Systems (ADAS), pulled off its IPO in late July and the deal was certainly a hot one. The company priced its shares at $25, which was above the projected $21-to-$23 range. As of now, MBLY is trading above $44.
So is there still an opportunity here? Or should investors be cautious with Mobileye?
Let’s take a look at the core business. MBLY uses low-cost cameras to provide safety features in cars. The technology, which is powered by sophisticated software algorithms and EyeQ chips, can anticipate possible collisions with other vehicles, cyclists, pedestrians, animals and debris. The Mobileye system can also detect such things as lanes, signs, traffic lights and barriers.
Actually, it would actually be pretty tough for a startup to disrupt the company. After all, MBLY has spent the last 15 years developing the technology, which has been in use since 2007. Consider that, for the past six months, the company has won more than 80% of the requests-for-bids on new business.
No doubt, the market potential is massive for MBLY. According to IHS Automotive, global auto sales were nearly 83 million last year. Yet Mobileye has only installed a total of 3.3 million systems over the past six years.
But there are some key factors that will spur adoption. First of all, many governments are putting in place regulations to require ADAS systems because auto accidents are a huge problem, with more than 1.2 millions deaths per year, 90% of which are caused by human error. Based on a study from AAA, accidents cost the U.S. about $300 billion annually.
MBLY should benefit nicely from the trend of self-driving vehicles. For example, the company has already developed technologies to allow for hands-free-capable driving at highway speeds. Although, commercialization likely won’t happen for for a few years. But the long-term opportunity is worth acknowledging.
Best of all, MBLY has been able to crank out robust growth. Over the last three years, revenues have skyrocketed from $19.2 million to $81.2 million. Oh, and the company has remained profitable. In 2013, net income came to $19.9 million.
In all, the company has 18 auto manufacturer customers, and the technology is available on 160 models. Some of the customers include Daimler’s (DDAIF) Chrysler, Ford (F), General Motors (GM), Honda Motors (HMC), Nissan (NSANY) and Tesla (TSLA).
Despite all these positives, there’s still one big issue with MBLY: the valuation. The stock currently trades at a forward price-to-earnings ratio of 112X and a price-to-sales ratio of 12X.
In fact, MBLY stock is close to the price targets from many Wall Street analysts. Take a look:
Morgan Stanley: $46
Raymond James: $46
Analysts are far from perfect, of course. With IPOs especially, valuations can easily go well beyond reasonable levels. But then again, investors can usually find a better price, especially as the hype subsides. There may be selling when the lock-up period expires (when insiders are allowed to sell their holdings) after about five months, as well as follow-on offerings of securities.
But again, given the high valuation of MBLY stock, investors are probably better off waiting for a dip.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.