FinTekNeeks

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Any Clarity on Mobileye Acquisition?

Posted in Trading

Intel’s recent buyout of Mobileye is somewhat puzzling. I understand they want to heavily invest in autonomous driving technology, I agree on the great potential and the possibility of becoming a reality very quickly. With predictions of having autonomous vehicles in a few years, Intel is predicting a conservative 7 years, by 2024 to have autonomous vehicles on the road. These cars cannot come soon enough, in my opinion.

Assist or Autonomous

There are two distinctions when discussing about autonomous vehicles. First is Advanced Driver Assisted Systems (ADAS) and full autonomous vehicles is referred to as Level 5 (L5). Recent years, auto manufacturers marketed ADAS in their vehicles, helping drivers brake suddenly to avoid collision or warning when drifting off driving lanes. My main gripe however is that ADAS needs a new name. This is too long to say and it seems a little redundant. Anyway someone can come up with a better acronym or just call it L4?

What I am really excited about is the advent of L5 vehicles. Full autonomous cars – where you get in, direct the car to a destination, and the car safely gets you there. At some point, there will be no need for owning cars, as point to point public transport will be ubiquitous. This will reduce overall automobile collisions and motor vehicle fatalities of around 35,000 per year in the US. This will reduce traffic tickets and many more DUI/DWI arrests. I guess the police will have to find other ways to increase their revenue.

I don’t expect all cars to be autonomous on the road immediately. It will probably take decades as software improves over time. However, it will greatly improve the elderly and many others to be more independent in early adoption.

Mobileye for the Trend Guy

Reviewing the information on the website, I perceive it to be mainly a software company with proprietary hardware. Until a recent change on their website, the tagline was, “The most trusted name in collision avoidance.” Touting 27 automakers with this technology, I relate it to the adoption of the automotive GPS navigation systems. Costing thousands of dollars as options, early GPS navigation was lacking in functionality and expensive to update. It mainly provided general routes to destination, but user interface was arduous. Eventually, newer systems provided more information like gas stations, restaurants, and retail stores. Interestingly, US was behind in this technology, where a decade before Japanese cars had sophisticated systems with traffic information and specific lane directions for route directions.

Now, the phone is so much better at navigation. Most people I know use their phones for navigation, and it is unlikely people will buy navigation options on their cars. Yes, I have heard about hiccups that send drivers to a lake, e.g. Apple’s first Maps app. Eventually they fixed the software, so I do not hear about that anymore.

The chart shows an interesting development. Near the end of 2016, the stock started showing volume and gapping up to reverse the downtrend. Prior to CES, the stock price crossed above the 50-day moving average and 200-day moving average. If one were to buy in January, the investor would have had a nice surprise in March. I would not be surprised if some traders in late December were not all surprised by the buyout news. (Hindsight = 20/20)

Before the announcement, the stock was at $10B market cap valuation. This was with $358M in revenues, with net profit around $121M in 2016. That is about 30% profit margin. They had a revenue increase of 49% from 2015 to 2016. With 67% revenue increase from 2014 to 2015, I did a simple linear extrapolation, guessing that revenues for 2017 will be $469M. What is interesting is that the deal was for $15.3B dollars, but the stock only jumped up and is hanging around $60 per share. This represents $13B market cap, not close to the announced $15B. I am highly suspicious and cautious when the stock price does not match close to the deal price after news announcement.

Why I am Skeptical

Here are some thoughts on why I am skeptical about Intel’s acquisition:

  • Intel is a hardware company. They bought McAfee in 2010 for $7.6B dollars. McAfee was a dominant antivirus software. Intel eventually spun out the company and it is debateable whether Intel had success with the software acquisition. Most people I know have other antivirus software installed, not McAfee.
  • Mobileye is not an open system. It is becoming a competitive space, and software development favors open source. Intel would benefit more where different companies can provide software to integrate into the hardware system that Intel manufactures. Fast innovation comes through competition. proprietary systems tend to dominate early but eventually loses market share.
  • It is a long road for Mobileye to L5 autonomous cars. The current software is capable of identifying threats on the road, the self-driving cars require additional software. Control and feedback systems, machine learning, mapping systems, traffic bypass systems, decision trees, and road conditions adjustments. The partnership with BMW and Intel plans to have production vehicles by 2024. Other companies have more aggressive timelines. However, I liken it to electric vehicles. One company may embrace it and take the risk to go full production with limited L5 driving. If a significant amount of people buy into it, then positive perception of the technology will be commonplace. Then an independant company will rise and build a cool self-driving car. All other majority car manufacturers will embrace it and integrate into their existing lines.
  • Tesla is no longer using Mobileye for their Autopilot. They have logged billions of miles for machine learning, valuable for data into autonomous driving. The data would be invaluable for Mobileye. Also, GM bought Cruise, an aftermarket manufacturer for highway driving. The deal is estimated to be about $1B, still much lower than Mobileye. GM is one large potential customer who is looking to develop their own L5 system instead of buying from Intel/Mobileye. Google, Uber, and several others are developing their own L5 systems. Less customers for Intel/Mobileye.
  • Titans of industry tend to innovate slower than startups. Enough said.
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Why I am Positive

Intel is an impressive company. No doubt there are thousands of intelligent, motivated engineers who can help the technology leap forward. With the 450+ experienced engineers at Mobileye, this should be more than enough to tackle the problem. Also, Intel has more than enough resources to fund the research for many years to come. Experience in legality and policy will play an important role.

Mobileye has already developed a mature technology for ADAS. They can build upon the platform to add more control of the car. With their 27 customers already using ADAS, it can be an easy transition for these same clients to adopt Intel/Mobileye future products. Intel has already purchased Movidius, allowing more collaboration of related technologies. Along with other strategic partnerships, the chances of success will be high.

Added competition is better for the consumer. I like having choices. Choices are more beneficial to the consumer and gives more value. If you have further thoughts on this, please share. I am excited what the next 7-10 years will bring. More excited than the flying cars I was promised in the 1980’s.

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