Mobileye: Time To Be Contrarian (NASDAQ:MBLY)

Mobileye (NASDAQ:MBLY) 4Q23 results that were recently published reflected the preliminary guidance that was provided earlier in January, but I found the 4Q23 results incrementally positive for both the near-term and long-term for Mobileye.

With Mobileye down more than 40% from its highs, I argue that this is the time to be a contrarian, especially for patient long-term investors.

This presents an excellent contrarian opportunity, as the company’s fundamentals are actually improving amidst a cyclical downturn in its EyeQ chips.

4Q23 in-line with guidance

In 4Q23, Mobileye saw revenues grow 13% from the prior year to $637 million, which was in the high-end of its preliminary guidance of revenues of between $634 million and $638 million for 4Q23.

Of note, SuperVision volumes in 4Q23 came in at 38,000 units, up from 29,000 in 3Q23. Mobileye did 67,000 units in 2H23 compared to 35,000 units for 1H23.

In total, Mobileye did 102,000 units in 2023.

Total adjusted operating income came in at $247 million, or 38.8% margins, which was also at the high-end of its preliminary guidance of between $241 million and $247 million.

Operating expenses came in meaningfully lower than expectations as a result of a favorable reimbursement for employees that were on military reserve duty as well as a better-than-expected engineering reimbursement for pre-design win activities with certain OEMs.

Also, over 2023, we saw operating margins improve from 27% to 39% as a result of the sequentially higher revenues and consistent operating expenses, highlighting the strong operating leverage that is achievable when Mobileye starts to generate more revenues from SuperVision and Chauffeur.

EPS came in at $0.28, marginally higher than expected.

In 2023, Mobileye generated $394 million in operating cash flows, while it invested $98 million in capital expenditures. This resulted in $296 million in free cash flows for 2023.

Guidance

The guidance for 2024 is in-line with its earlier preliminary guidance provided earlier in January and it reflects the excess inventory situation for EyeQ chips at its customers.

Management continues to expect 31 million to 32 million EyeQ shipments in 2024.

I will note that it is also incrementally positive that management seems to have an improved visibility into 1Q24 and 2Q24 over the last few weeks, which leads me to believe that the destock embedded into the guidance is sufficient.

Management expects that out of the 6 to 7 million excess EyeQ inventory, 5 million units should be cleared in 1Q24 and the remainder to be cleared in 2Q24.

Also, similar to my own expectations, management emphasized that they expect revenue and volumes to snap back quickly. While management expects 3.4 million EyeQ units to be shipped in 1Q24, the volumes should increase at least 100% in 2Q24, and the balance to be shipped in 2H24.

Thus, this is in-line with the preliminary guidance provided earlier that the excess inventory situation should be cleared by the end of 1H24.

The reason for the fast snap back in revenues and volumes for EyeQ chips is due to the good visibility and the nature of this business given that these EyeQ inventories are meant for specific OEMs and vehicle platforms and Mobileye just needs to reduce shipment in the near-term for these customers to absorb their current inventory before continuing to ship more again.

The inventory situation only relates to EyeQ chips and SuperVision inventory is at a normal level.

For SuperVision, management expects between 175,000 to 195,000 SuperVision shipments in 2024. This represents a strong growth of 81% in SuperVision shipments in 2024 as the business continues to scale and ramp.

For 1Q24, Mobileye expects revenue to be down by 50% to approximately $230 million and EyeQ volumes to be down correspondingly to 3.4 million units. SuperVision units to be shipped is expected to be around 30,000 units, unaffected by the EyeQ chip excess inventory situation. This results in SuperVision being a larger part of the revenue mix in 1Q24 and thus, gross margins are expected to be in the mid-60 percent range. 1Q24 adjusted operating income is expected to come in at a loss of between $65 million to $80 million, as expected.

For 2024, management expects the average system price to continue to increase relative to 2023 as SuperVision continues to ramp.

Pipeline and design wins going well

In 2023, Mobileye managed to significantly diversify its revenues from a company with predominantly Chinese and electric vehicle customers, to a wide range of OEMs, in terms of geographies, price points and powertrain types.

One of the most significant wins in 2023 was the design win with the major western automaker. This is the first global OEM to incorporate the full suite of Mobileye platforms, ranging from Mobileye SuperVision, Mobileye Chauffeur to Mobileye Drive.

This design win also led to more than doubling of the number of vehicle models in Mobileye’s pipeline and covers many different geographies and powertrain types.

In addition, given that this is a major western automaker that is established and a global player, the endorsement of Mobileye by this major western automaker also will certainly help close more deals in the future.

Thus, in 2023, Mobileye was successful in moving the customers within its funnel into actual design wins, which leads to greater confidence by customers in Mobileye’s solutions, as well as an increasing sense of urgency within the industry to deploy such solutions.

In 2023, apart from the design wins with the major western automaker, Mobileye was also awarded SuperVision design wins with Porsche, FAW, and Mahindra.

This resulted in the number of models in Mobileye’s design wins to grow from just 9 at the start of 2023 to 30 as of 4Q23.

In addition, I also think that my expectation that SuperVision will act as a bridge to higher value and more advanced platform solutions like Chauffeur played out in 2023, when the major western automaker, Polestar and FAW all awarded production programs on the Chauffeur platform in 2023.

As of 4Q23, Mobileye now have design wins or are in advanced discussions with 11 OEMs that make up 37% of industry production.

This is up from 3Q23, when Mobileye had 10 OEMs representing 34% of industry production.

This is significantly higher from the start of 2023, when Mobileye only had 3 OEMs representing 9% of the industry.

The total value of the design wins achieved in 2023 amounted to $7 billion, and this was the second year in a row that Mobileye achieved design wins worth $7 billion in future projected revenues. In 2021, Mobileye achieved design wins that are worth just a total value of between $2 to 3 billion.

Thus, over the last three years, Mobileye has achieved design wins of $16 to $17 billions in future projected revenues.

More importantly, in-line with my thesis that the ramp of SuperVision units is key to Mobileye, we have also seen that the average selling price has steadily increased.

In 2023, the implied average selling price from the agreement was $122, up from the implied average selling price of $105 in 2022.

In 2021, the implied average selling price was just $65 and in 2023, the average selling price of its actual revenue is only $53.

As a result, we can see that the design wins from 2021 to 2023 have resulted in higher average selling prices as the platforms like SuperVision, Chauffeur and Drive were included in the agreements.

This also highlights the upside to revenues in the long-term due to the low average selling price of the actual revenues today.

Based on what CEO Amnon Shashua mentioned in the 4Q23 earnings call, it suggests that while there was a very long and lengthy due diligence process for the first few customers of Mobileye, with the recent large design wins, the due diligence phase is getting shorter.

For 2024, management suggested that they expect to see a number of design wins from both western and Chinese OEMs, and that the timing of these design wins will be likely in the second half of the 2024.

Other positives

Management continues to see Mobileye provide distinct value propositions to customers, in the form of improved safety, higher productivity, and improving the utilization of vehicles as full autonomy is reached.

As OEMs capital efficiency rose, there is a stronger focus on things like time to market, costs and performance, which plays into the hands of Mobileye.

SuperVision is now in more than 190,000 vehicles today and this number will be ramping up significantly in the years to come.

Mobileye also delivered the full highway software in August and expanded the design domain to 22 cities as of 4Q23, up from just two in September.

Lastly, Mobileye also introduced a collaboration framework, DXP, which allows its automaker customers to customize the driving experience of a SuperVision of Chauffeur-based system.

Valuation

My earlier financial model and valuation have already taken into account the preliminary guidance provided (can be found here), and thus, given that 4Q23 was in-line and the guidance for 2024 was reiterated, I am also reiterating the valuation from earlier.

To recap the financial model from the earlier article:

As highlighted before, the intrinsic value for Mobileye is $47, which is based on a terminal multiple of 25x, down from the earlier 30x, and a discount rate of 9%.

My 1-year and 3-year price targets are $36.30 and $64.50 respectively.

Given the very low base in EPS for 2024 as a result of the cyclically low revenues and profits, the 1-year price target is based on 90x 2024 P/E, which may sound like a lot, but on the very low base of 2024 EPS that is down close to 50% from the prior year.

For the 3-year price target, I am using a 45x 2026 P/E.

From a 1-year point of view, Mobileye is trying to get through the inventory drawdown and thus, financials may be somewhat muted. However, from the 3-year point of view, this will showcase the true potential of the financials of the company as it is no longer constrained by cyclical industry factors.

Conclusion

While the 4Q24 quarter was largely in-line after the preliminary guidance was provided earlier in January, the call provided incrementally positive updates about the company’s improved near-term visibility, along with positive updates about the pipeline and business activities.

As I have mentioned many times, the investment thesis for Mobileye lies in the ramp of SuperVision.

This ramp is unaffected by the current excess inventory situation with its EyeQ chips and thus, I am unaffected by the near-term noise created as a result of an elevated inventory position of EyeQ chips in its customer base.

I continue to see positive developments, whether it is that customers are starting to adopt not just SuperVision, but also Chauffeur platforms, and also the growing number of customers in its design win or pipeline that just demonstrates the strong value proposition that Mobileye brings to the table.

In my opinion, Mobileye is one company to own today given the inflection we will see in the coming years. The design wins from 2021 to 2023 alone are significant, representing 8 times that of 2023’s revenues, and I expect more design wins to come in from 2024 and beyond.

There’s probably never been a better time to buy Mobileye, given the depressed sentiment and improving fundamentals.

This is the time to be a contrarian.