Ask ten shareholders what they think of the this week’s decision from Intel Corporation (NASDAQ:INTC) to acquire Mobileye NV (NYSE:MBLY) and you’ll get ten different answers. Most of those answers, however, won’t be terribly favorable opinions regarding the deal.
Either the iconic chipmaker overpaid for Mobileye shares, or Intel has no business leaving its comfort zone (CPUs and chipsets), or both. Besides, long-term INTC owners know the company doesn’t have the best track record when it comes to making acquisitions.
There’s a certain “crazy like a fox” quality to this purchase, though. Intel stock holders may want to take a step back and look at the same long-term picture CEO Brian Krzanich is seeing.
On Monday, tech-giant Intel announced it was acquiring Mobileye — the maker of the “eyes” used by self-driving and auto-braking automobiles — for $63.54 per share of MBLY, or $15.3 billion in all.
That’s a 45% premium to Friday’s closing trade! But perhaps more concerning is that at $15.3 billion, Intel will be paying 42.7 times last year’s sales and 141.7 times 2016’s income from Mobileye. Both are on the order of ten times the norm.
Analysts were mixed on the matter, although a few were particularly optimistic. Perhaps the most bullish view came from Rosenblatt Securities analyst Hans Mosesmann, who explained:
“Intel is seeking relevance in automotive with the Mobileye acquisition in a market that is moving at a faster-than-expected pace. The acquisition is in line with the Altera acquisition in that it is defensive in nature and meant to defend Intel’s historical CPU (central processing unit) incumbency from various accelerator technologies.”
At the more pessimistic end of the scale, Global Equities Research analyst Trip Chowdhry opined:
“Basically, Intel has now inherited Mobileye’s problems, and we don’t think Intel has the capacity to fix Mobileye’s issues.”
All those views may be too short-sighted, however.
What Intel Sees in Mobileye
Krzanich justified the decision to INTC shareholders by saying:
“It’s important now, because if you take a look at what you’re doing – talking about car models in 2020, 2021 – and so we need to get in there. We need to get this platform developed, brought to them, and have that confidence so that we can really influence the real start of autonomous driving in that time frame.”
He’s right, in all ways.
He’s right in the sense that although self-driving cars aren’t exactly new, the market isn’t gelled yet — there’s room for new players to step up and shape what the future of autonomous driving looks like. Better for Intel to shape it on its terms then end up chasing the lead pace set by the likes of Tesla Inc (NASDAQ:TSLA) and Nvidia Corporation (NASDAQ:NVDA).
He’s also right in the sense that by 2020/2021, the landscape of the self-driving car market is going to look radically different. Not only will the market leaders be well-entrenched by then, there’s going to massive growth in the number of autonomous cars on the road by that time.
How massive? BCG recently crunched some numbers, concluding that by 2035 annual sales of fully autonomous vehicles will reach 12 million. Annual sales of partially-autonomous cars will rise to 18 million by that point.
Investors won’t have to wait that long to see big-time growth, though. BCG thinks the market will be worth $42 billion by 2025, and grow to $77 billion by 2035. At the end of the timeframe, roughly a fourth of all new cars sold will offer autonomous driving features.
In a separate study, Lux Research concluded that, by 2030, the self-driving automobile market will be worth $87 billion. Lux added that software developers will be the biggest winners of the movement. Making the hardware work is the hard part.
With Mobileye now under its wing, Intel has access to a full-blown platform — complete with software — it didn’t have before.
Bottom Line for INTC Stock
It’s not a deal that’s going to pay dividends (literally or figuratively) tomorrow, or even next year. Give it two years, though, or even five years for the autonomous car market to mature. It’s coming, and it’s going to be big. It’s far easier and far more affordable for Intel to stake its claim now than it will be to try and break into the market later.
If nothing else, Intel wanted to make sure it made Mobileye its own rather than risk letting a competitor get hold of the up-and-coming company. The value will be there eventually.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.