The idea of a car that can travel around with zero human intervention might have sounded a bit utopian and otherworldly a few years back.
But thanks to the ceaseless efforts of a consortium of automakers led by Google (GOOG, GOOGL) and the Open Automotive Alliance, as well as driverless technology providers such as Mobileye (MBLY) and Nvidia (NVDA), the sight of cars zooming down the streets with a single occupant perched on the back seat catching a nap might soon become a pretty common thing.
Mobileye is one of the companies at the forefront of this sci-fi technology, and the investing world can’t seem to get enough of it. Mobileye stock is up 42% YTD and has more than doubled from its 2014 IPO price of $25.
Mobileye is an Israel-based company that develops the complex software and related technologies that are used in camera-based driver automation systems.
So while a company like Nvidia develops Tegra 4 processors that power the navigation systems in driverless cars, Mobileye provides the software that tells the car exactly what to do at any instance, including anticipating accidents and steering clear out of trouble.
Too Much Love?
It’s not unusual for a stock to enjoy a huge runup in the months following an IPO. But it is rather unusual to find a company in the automotive technology space that sports the kind of stratospheric valuation that Mobileye does.
With a price-to-sales ratio of 79, Mobileye stock makes Tesla (TSLA) suddenly look dirt cheap (TSLA stock sports a PS ratio of ‘‘just’’ 9). And, just like Tesla, Mobileye has yet to become profitable.
Wall Street seems particularly starry-eyed about the Israeli company, and continues to dish out a seemingly unending procession of upgrades. Here’s a rundown of recent Wall Street upgrades on Mobileye stock:
- Citi hiked its price target in May 21 by $8 to $70 (23% above current price)
- Wells Fargo upped its valuation range on Mobileye stock from $51-$54 to $54-$60 on June 10
- Baron Capital’s Ron Baron chimed in positively for Mobileye during a CNBC morning plug on June 17
- CLSA launched coverage on Mobileye with a “buy” rating and a $67 target on June 25
- Baird upgraded Mobileye stock by a hefty $26 to $73 on July 9 citing a favorable regulatory climate
All these analysts have been gushing about Mobileye’s prospects, and have given a host of reasons why they think Mobileye stock remains a good investment despite its lofty valuation.
But perhaps the most enthusiastic piece of commentary on Mobileye was that given by Ron Baron of Baron Capital. Ron claimed that Mobileye enjoys an ‘‘essential monopoly’’ in ADAS chips and software backed by 13 years of data collection efforts. Baron also added that Mobileye enjoys robust working relationships with 23 out of 25 top automakers.
Baron expects Mobileye to post annual revenues of $5 billion to $6 billion and profits of $3 billion to $5 billion in 10 years. For context, Mobileye is expected to finish the current year with merely $350 million in revenue, so Ron’s estimates call for Mobileye to grow its revenue by 32% annually over the next 10 years.
Growing Into Steep Valuation
To be fair, the defense seems quite valid. To buttress Ron’s point, the fact that Mobileye provides both the software and the chips for driver-assisted and driverless cars gives it control over a complete supply chain loop and places the company in a very strong position when negotiating prices with auto makers. That’s the kind of pricing power that all technology suppliers covet, but few ever get to enjoy.
Even if we assume other companies join later the space and start providing some credible competition for Mobileye, the company’s huge lead in a potentially disruptive technology at least partly justifies the stratospheric valuation of Mobileye shares. The nagging questions are how soon Mobileye can grow into its steep valuation, and how soon will we actually see the first driverless cars?
Wells Fargo is one of the few analysts that have given an actual date for when Mobileye might turn a profit. The analysts project that the company will post earnings of $1.11 per share in 2017, giving MBLY stock a forward valuation of 51.
Though that valuation still appears steep, it’s a lot more palatable and can easily be tolerated in a growth company. After all, companies like Tesla and Amazon (AMZN) have carried far higher valuations for years yet managed to remain in investors’ good books as long as their growth stories remained intact.
With consensus projections that Mobileye will grow its earnings at a very healthy 62.5%, the valuation gripes might soon become a thing of the past.
As far as when we might start seeing fully autonomous cars on our roads, most auto makers with a leg in the technology see it becoming a reality about seven or eight years down the road. Audi, however, says that the next-generation Audi 8 to be unveiled in 2017 will be capable of full-autonomous driving.
But Mobileye doesn’t have to wait that long — driver-assisted cars will keep its hands and coffers full for the time being. So Wall Street and the investing world seem to be giving Mobileye stock a bit too much love, but it appears to be well-earned.
As of this writing, Brian Wu did not own any of the aforementioned securities.
