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After 38% IPO Pop, Keep Your Hands Off Mobileye Stock – Forbes

by Oct 28, 2022Blog0 comments

Nir Gideon, development expert at the company Mobileye in Jerusalem, drives around inside an … [+] “autonomous Audi” near Jerusalem, Israel, 09 May 2016. The company has developed an algorithm and a chip which could intervene in driving and prevent accidents. Photo: Stefanie Jaerkel/dpa | usage worldwide (Photo by Stefanie Järkel/picture alliance via Getty Images)
In 2017, Intel paid $15.3 billion to acquire self-driving car purveyor Mobileye. On October 26, Intel hoped to sell it to IPO investors at $21 a share, according to the Wall Street Journal.
The good news is that Mobileye shares popped nearly 38% from the initial trading price, according to CNBC.
Does this mean that the IPO market — which has been nearly shuttered for most of 2022 — is now back open? Should you buy Mobileye stock before it goes even higher? My view is

(I have no financial interest in the securities mentioned).
Mobileye was cofounded in 1999 by its current CEO Amnon Shashua, a computer science professor at Hebrew University in Jerusalem. He helped take it public in the U.S. in 2014 and has been its CEO since 2017 when Intel acquired it for $15.3 billion.
Since then, the value that the market assigns to Mobileye has plummeted. Since the acquisition, Mobileye’s sales have increased 567% while its valuation is up a paltry 11%.
How so? Back in 2017, Mobileye had $210 million in sales — yielding a price-to-sales ratio of 73. The $17 billion valuation at which Mobileye went public values its $1.4 billion in 2021 sales at an 84% lower price-to-sales ratio of 12.
Despite this less-than-stellar result, Mobileye has a fascinating history. One of Shashua’s Mobileye cofounders, Ziv Aviram, told me in April 2018, “Before Mobileye I was CEO of three companies — two of the three were the biggest retail chains in Israel. I grew up in marketing. In 1998, Professor Shashua and I met with Toyota which challenged us to solve the problem of automobile accidents with two cameras.”
Toyota’s challenge to the pair led to the creation of Mobileye. “We thought, ‘Why not with one?’ It took us five minutes to decide to start the company which we did in 1999.”
The journey to that $15.3 billion exit required many course changes. “We started with the market need and tried to figure out the right technology. Over 19 years we found ourselves at 10 big decision junctions,” he said.
Rather than provide just one service, customers wanted all of them sold by a single supplier. “When we started the company, a few competitors were working on the problem of vehicles departing from their lanes — so we decided not to do that. But we got a request for quotation from GM which asked us for lane departure — we realized that to win we would need to offer the full suite of services — lane departure, vehicle detection, and pedestrian detection.”
Mobileye also decided to focus on winning over so-called Tier II automotive industry suppliers rather than Tier I. As Aviram explained, “The Tier II vendors were supplying the Tier I who had the contracts with the OEMs (the vehicle manufacturing companies). Today, Mobileye is in 95% of vehicles.”
Once Mobileye went public, it began working on autonomous driving. “The question of how to map the world inexpensively for that market triggered the deal with Intel,” he said.
Aviram expected to achieve a bigger result with OrCam, maker of a device that reads words to the blind and visually impaired, that he cofounded with Shashua in 2010. As he said, OrCam — of which he was then CEO — targeted an enormous market.
“The potential market for this product is 1 billion users. There are 350 million people who are blind and visually impaired. And our product can also help people who are severely dyslexic — which accounts for 3% to 5% of the population — and people who get fatigued while reading,” Aviram told me.
Intel also invested in OrCam ($6 million, according to Aviram). In February 2018. OrCam was valued at $1 billion after the company raised $30.4 million from a sale of 3% of the company to Israel’s Clal Insurance and Meitav Dash DASH — bringing its total outside funding to $130.4 million.
Sadly, OrCam did not achieve Aviram’s ambition of going public in 2019. The company reset it hopes for an IPO in 2021 at a valuation of $3 billion. But in 2021 Aviram was replaced as CEO by Rani Hagag. And recently OrCam replaced Hagag with Elad Serfaty, a former EVP at Mobileye.
On October 23, OrCam announced layoffs of 16% of its staff this month, according to Calcalist. This does not bode well for OrCam’s investors — including Intel.
Mobileye’s second IPO yesterday took place in very unhospitable soil. As the Journal noted, “IPOs in the U.S. had raised only $7.4 billion so far this year, putting 2022 on track to be the worst year for new issues in decades.”
With the NASDAQ down 26% over the last 12 months — compared to a 15% loss for the S&P 500 — it is no wonder that technology IPOs are not happening. IPO volume in the US has plummeted 92% to $22.5 billion since January 1, compared with the same point in 2021, according to the Journal.
While Mobileye’s IPO priced at $21 — above the stated range of $18 to $20 — that yielded at a $17 billion valuation that was way below the roughly $50 billion valuation Intel had hoped for when it filed in March.
It looks like Intel saw this IPO as a way to raise badly needed cash. According to SeekingAlpha, after the IPO, Intel will use a “significant portion” of the estimated $800 million in net proceeds generated by the IPO to repay a Mobileye note to Intel.
In addition to the IPO, Mobileye also privately placed 4.76 million shares at the IPO price with General Atlantic to raise about $100 million.
But Intel is in control. Its Mobileye’s Class B shares give it 99.4% voting power over Mobileye, reported Bloomberg.
What’s more Intel sold a very small proportion of the shares and lined up big buyers for the small number it offered. As the Journal reported Intel issued “fewer shares than planned—representing only about 5% to 6% of those that will ultimately be outstanding. Intel also lined up so-called “cornerstone buyers for roughly 40% of the deal.”
Given these tightly controlled conditions aimed at engineering a first-day pop, this is not the sort of deal that is likely to revive the IPO market.
Mobileye’s driverless-car technology was in great demand several years ago but has since cooled. Moreover, according to Bloomberg, Mobileye faces “stiff competition, including from Alphabet’s Waymo and Amazon’s Zoox.”
The company now has substantial cash and more revenue than it reported back in 2017 — but it is losing money. As of July, it had $774 million of cash and cash equivalents. In 2021, the company generated $1.39 billion in revenue and lost $75 million, according to its filings.
On the plus side, Mobileye has big name customers. According to CNBC it “partnered with Audi, BMW, Volkswagen, GM, and Ford to develop advanced driving and safety features such as driver assist and lane-keeping using the company’s ‘EyeQ’ camera.”
Mobileye said that 50 companies are currently using its technology in 800 vehicle models. Second quarter revenue increased 41% to $460 million and its net loss dropped to $7 million from $21 million.
Mobileye is optimistic about its growth prospects. Indeed Shashua wrote in a letter to shareholders that Mobileye’s driver assistance technology would gain considerable share in the next eight years — growing 116% by 2030 from 125 million vehicles to 270 million.
And he still aspires to a future where autonomous vehicles fill our roadways. “While the core of our business today is making human-driven cars safer, we are working tirelessly to bring about a future of autonomously driven vehicles,” Shashua said.
I agree with the AV pessimists. As Bloomberg wrote, “The bright future for self-driving vehicles that was prophesied by Intel, Waymo and others has sputtered. A world full of robo-taxis seems at best decades away and the losses for investors who put faith in the field are mounting.”
Do not rush into Mobileye stock. Instead, wait to see whether it can beat expectations and raise guidance after its first earnings report.