Autonomous Vehicles Market Holds Huge Potential For Mobileye Stock

  • Mobileye is one of the hottest names in the autonomous vehicles market.
  • The collision avoidance system developer grows its top line at an impressive rate from currently selling its products to top notch automakers.
  • Mobileye tries to become the industry standard for camera-based collision avoidance system.
  • While in the long-term Mobileye withholds significant potential, in the short-term it is a risky investment heavily impacted by speculations of its position in the autonomous vehicles market.
Mobileye stock holds significant potential over the long term

Developer of camera-based driver assistance systems, Mobileye (NYSE:MBLY) is one of the hottest Israeli tech companies lately. The Jerusalem-based firm went public last year and raised almost $1B in a very successful IPO that was the biggest public offering ever for an Israeli company listing on a U.S. stock exchange. Mobileye’s customers include top notch car manufacturers such as Tesla (NASDAQ:TSLA), General Motors (NYSE:GM), BMW and Ford (NYSE:F) which are also leading the autonomous vehicles development trend. Mobileye maybe selling its systems to leading manufacturer right now to be implemented in their current models as an extra safety precaution, but its real target is the autonomous vehicle market that withholds a massive growth potential for the company.

Mobileye Operating Segments

The company operates in two segments:

  1. Original Equipment Manufacturing (OEM) segment: includes revenues from sales of SoCs for new vehicles mainly through system suppliers to the automotive industry. This segment generates 85% of Mobileye’s revenues while it grows at a yearly rate of 77% as shown in chart 1 below,
  2. After Market (AM) segment: includes revenues from sales of complete systems for existing cars either in large fleets of commercial vehicle or car dealers through distributors and insurance companies. This smaller segment accounts for only 15% of the total revenues and grows slower than the OEM part.

Mobileye segment revenues and profits

Mobileye solution includes software and hardware pieces that interpret camera inputs into alerts that help drivers to anticipate and avoid collision with pedestrians, cars or other objects in their path. The increase in awareness for collision avoidance systems and regulatory requirements in some countries drives Mobileye growth, with revenue growing at a quarterly rate of 13% and an annual rate of 65%. Mobileye presents not only impressive top-line growth figures, but also had an impressive gross margin of 74% in 2014 and a Non-GAAP net profit of $46M in 2014. Even though Mobileye presents impressive growth rates and a Non-GAAP profit, its enormous potential lies in the evolving autonomous cars market.

Autonomous Vehicles Market

Autonomous vehicles are the next big thing in the automotive industry after electronic vehicles penetrated this conservative market. Currently, most automakers offer some electronic cars, either conventional hybrids, plug-in hybrids or battery electric vehicles and in parallel work on their autonomous driving solution. There is no consensus when autonomous vehicles will be publicly available, but the general perception is in five years around 2020. This may sound like a long time from now, but in these five years automakers need to solve many problems:

  1. Legal status: A driverless car opens legal issues regarding the responsibility for traffic laws violation and licensing problems. A driving license allows a person to drive a motor vehicle, and this person is responsible for any action made during the journey. If an autonomous car exceeds the speed limit or jumps a red light, who will be responsible for these actions, the passengers or the car owner? Also, if there is no driver, will there be a need for driving license in order to use these cars? What is the minimum age to operate an autonomous car?
  2. Safety requirements and standards: in current conventional cars there are many safety requirements that had evolved with time and seem trivial now such as side mirrors, airbags, seatbelts, ABS, etc. Before autonomous cars go into mass productions, automakers and regulators need to agree on a list of safety requirements and how to comply with these requirements: which safety systems to use? What are the technical requirements for each system? Is there a list of approved suppliers that could manufacture the safety systems?
  3. Safety mechanism in case of technology failure: will stop in the event of tech failure, and switch to human-driver mode? Is there any cloud-based software backup for these cases?
  4. Industry standards: in every industry there is an organization that specify a list of checkbox items that developers have to meet in order for their products to be accepted by the specific industry. The autonomous cars industry needs to create such an organization instead of depending on sporadic attempts of some players.

This trend impacts all major automakers, and most of them announced they had an autonomous car in development or plan to start the development process. As autonomous vehicles development is more of a technological challenge in the software/hardware space, many automakers open an R&D facility in the Silicon Valley to develop technology solution in-house and look for relevant start-ups to acquire. As autonomous vehicles is an extremely innovative market it is no surprise that tech giants such as Google (NASDAQ:GOOGL), Intel (INTC), NVidia (NASDAQ:NVDA) and smaller companies as Freescale (NYSE:FSL) and Altera (NASDAQ:ALTR) are trying to penetrate this market. Automakers plan to use software not only as building stone of this revolution but also as a differentiator between the different vendors.

As mentioned above there are many tech companies developing different solutions for the autonomous market and as long as there are standard requirements, these companies can try to become the norm. Mobileye collision avoidance system is moving directly in this position to become an industry standard. According to the Boston Consulting Group, the autonomous vehicles market is expected to grow to $42 billion by 2025. As Mobileye solution is a central piece of every autonomous vehicle, the growth potential for Mobileye revenue is incredible if it succeeds to grab even a small fraction of this market.

Conclusions

Mobileye operates in one of the hottest markets in the technology market – the autonomous vehicles market. The company develops collision avoidance systems that are currently implemented in luxury cars and aims to implement its solutions in future driverless vehicles. Mobileye's impressive top line growth coupled with enormous market size for autonomous cars in which it is expected to play a central role make Mobileye an attractive long-term investment. However, in the short-term until Mobileye will start closing deals for autonomous cars’ systems, the stock will be trading mainly based on expectations for the company’s future sales in the autonomous market. For most investors, that type of stock is a little bit too speculative at this point. However, short-term traders can benefit from the large swings in the stock price. Investors looking for a long term upside need to be patient as there might be a few years before Mobileye starts unlocking its true value either from large deals or from being acquired by a larger player (automaker or another technology provider).

Disclosure: Information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer’s opinion about the companies mentioned in the article. Investors should conduct their own due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

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