Mobileye NV (NYSE:MBLY) posted a solid third-quarter earnings report, but it wasn’t enough to gin up investor excitement. Early on, MBLY stock is down about 3%, extending a funk that has lasted since August that has shares off more than 20%.
But don’t despair. Mobileye stock will be driven back higher — just not by fundamentals.
There was little wrong with Mobileye’s earnings, by the way. Revenues jumped 34.4% to $94.9 million, and the company reported an adjusted profit of 19 cents per share. That beat top-line estimates of $89.9 million and bottom-line expectations for 18 cents per share.
Plus, MBLY continues to enjoy a nice growth ramp. Says CEO Ziv Aviram:
“Strategically, we continue to see rising interest for higher-level autonomous vehicle technology. Most new customer requirements for future programs now include a semi-autonomous feature-set in addition to Advanced Driver Assist System safety features.”
MBLY also continues to crank out the cash flows. In the quarter, operating cash flows came to $38.6 million, up from $26.2 million in the year-ago period. In all, Mobileye now boasts about $585 million in the bank.
Perhaps the most important development for MBLY stock during the quarter was a deal with auto parts supplier Delphi Automotive PLC (NYSE:DLPH). The companies will work together to develop a fully autonomous driving system by 2019.
All in all, the partnership is a pretty good fit. Mobileye focuses on vision systems, mapping and machine learning, while DLPH has tremendous expertise with automated driving software, sensors and integration.
But not everything has been rosy for Mobileye.
Problems for MBLY Stock
Mobileye has continued its bitter dispute with Tesla Motors Inc (NASDAQ:TSLA) that centers around a fatal car crash in which the driver was using Tesla’s Autopilot system. Mobileye claims Tesla was being too aggressive and encouraged hands-free driving. TSLA, on the other hand, has blamed the radar system.
Such technologies will take time to refine and perfect. But the autonomous driving market opportunity is simply too massive to ignore. According to Boston Consulting, the global spending is expected to reach a whopping $42 billion by 2025.
As a result, the competitive environment continues to get more intense. MBLY must not only fight against mega tech operators like Alphabet Inc (NASDAQ:GOOGL) but also traditional automakers such as General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F), which have been aggressively building their own systems.
In other words, the end game for MBLY stock may ultimately be a buyout.
This week, Samsung (OTCMKTS:SSNLF) swooped in with an $8 billion acquisition of Harman International Industries Inc (NYSE:HAR), which has key assets in software systems and components for autos. And there’s also Qualcomm, Inc.’s (NASDAQ:QCOM) $39 billion deal for NXP Semiconductors NV (NASDAQ:NXPI), which boasts an extensive business in semiconductors for the auto industry.
Mobileye has many assets that would attract a suitor, such as the EyeQ chip, which powers interpretations of visual fields to detect collisions and is in its third generation. Also, its technologies already have been in use across a number of new car models since 2007.
A buyout of all MBLY stock, at a 20% premium, would go for just more than $10 billion in today’s prices. That’s not cheap, but it’s digestible enough to seriously consider.
To me, a Mobileye buyout seems more a matter of when, not if.
Tom Taulli runs the InvestorPlace blog IPO Playbook and also has his own tax preparation firm. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.