I’ve long thought Mobileye NV (NYSE:MBLY) is too expensive. Mobileye has an interesting opportunity in driver assistance, and eventually, autonomous driving. But it also has intense competition from companies ranging from Nvidia Corporation (NASDAQ:NVDA) to Alphabet Inc (NASDAQ:GOOGL) to Tier 1 suppliers like Delphi Automotive PLC (NYSE:DLPH) and Autoliv Inc. (NYSE:ALV). But I haven’t shorted MBLY stock — yet — and I hardly thought Mobileye’s fourth-quarter earnings on Wednesday presented an opportunity.
After all, MBLY is a story stock, and the story looked strong heading into Mobileye earnings. A series of deals and partnerships announced in the past few weeks led MBLY stock up 35% from late December lows. Optimism around autonomous driving and increasing automotive technology continues to rise; there’s a reason Tesla Inc (NASDAQ:TSLA) stock is near all-time highs. Betting against that in the short-term seemed foolish.
That story appears to hold for a little while longer, as Mobileye earnings out Wednesday morning came in ahead of consensus estimates and the company’s own guidance. In response, MBLY stock reversed from modest gains to modest losses back to 2%-plus gains again in premarket trading. That seems to imply that investors already are looking forward.
But it’s there the Mobileye story might have some holes.
Mobileye Earnings Look Solid
Mobileye earnings for Q4 beat both Street consensus and its own guidance on the top and bottom line. Revenue of $104.6 million, in particular, looks impressive. MBLY had guided for roughly $96 million coming out of Q3 in moving expectations to the high end of a full-year $344 million-$350 million range. Heading into the earnings report, analysts largely backed those projections.
The beat, then, implies growth roughly 11 points higher than thought, with revenue growing almost 46% year-over-year.
The driver (no pun intended) appears to be aftermarket sales. Those sales — largely dash-mounted systems on existing cars, rather than installed systems in new cars — increased 156% year-over-year. MBLY management had raised full-year projections for that division after Q2 to 20% of total sales. In fact, Q4 Mobileye earnings show the aftermarket drove 23% of full-year revenue, with sales increasing 113% for full-year 2016.
Earnings per share beat consensus and implied guidance by 2 cents, which implies that profit margins were roughly as expected. The reason likely is that aftermarket sales offer lower gross margins, and thus aren’t quite as profitable. MBLY has improved gross margins in the business, but mix seems like the most significant reason why the company didn’t better leverage sales growth.
Long-Term Questions Remain for MBLY Stock
The fact that the revenue beat came from aftermarket growth isn’t quite the outcome that Mobileye stock bulls would have preferred for Q4.
The exciting business here is in OEM, from both the standpoint of market opportunity and profit margins. While 113% growth for aftermarket sales is nothing to sneeze at, it’s still off a rather small base. And $82 million in aftermarket sales for 2016, on its own, isn’t near enough to support a stock with an enterprise value over $10 billion.
That seems to mean investors are looking forward. 2017 guidance on the conference call is for EPS of $1.01-$1.05 and revenue of $490 million-$505 million. Earnings appear just shy of analyst estimates of $1.04, while revenue of $490 million-$505 million suggests an outperformance to Street expectations of $491 million.
That combination, however, means margins will be a bit lower than forecast by analysts. That, in turn, likely comes from a higher-than-expected proportion of aftermarket revenue — again, not what the bulls necessarily wanted to hear.
And that may be enough for some of the long-term concerns to enter the narrative in MBLY stock in post-earnings trading.
Morgan Stanley downgraded Mobileye stock at the beginning of the month based on margin concerns — a move that took MBLY stock down 3%. And the ability of Mobileye to maintain margins is a big concern of mine, longer-term.
I’m still skeptical that any semiconductor company can hold pricing (and thus margins) longer-term. One of the few exceptions, of course, is Nvidia itself. But Mobileye stock, now trading at ~45x 2017 EPS, still is priced higher than NVDA, and part of Nvidia’s huge gains over the past year have come from optimism over prospects for its Drive PX 2 platform.
That platform is what Tesla turned to after its relationship ended with Mobileye (and somewhat acrimoniously). That decision alone illustrates the long-term challenges. Competition will be intense, and pricing will be too. It’s important to remember that MBLY is a semiconductor company (though it has software capabilities, admittedly) and an automotive supplier. Neither industry traditionally gets very high earnings multiple, because both businesses are extremely tough.
For Mobileye to be an outlier on both fronts, its execution needs to be perfect, and its growth flawless. Mobileye earnings for Q4 show a step in the right direction from that standpoint.
But with the earnings beat driven largely by aftermarket sales, that step probably isn’t big enough for MBLY stock to take another step higher.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
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