Intel Accelerates Its Ongoing Transformation With Mobileye NV Acquisition

In this segment from Motley Fool Money, Chris Hill welcomes Seth Jayson, Andy Cross, and Ron Gross to the radio show to discuss the major deal announced earlier this month between chip giant Intel (INTC -0.84%) and autonomous vehicle tech company Mobileye (MBLY).

Given Intel's well-publicized plans to transform its business, this full-speed investment in the driverless car industry will be important to follow. But did the company overpay?

A full transcript follows the video.

This video was recorded on March 17, 2017.

Chris Hill: Deal of the week goes to tech giant Intel, which agreed to buy Mobileye for the tidy sum of $15.3 billion in cash. Mobileye is in the business of autonomous driving and accounts for about 70% of the global market for anti-collision systems. They've got the money over at Intel, Andy. But even though they have the money, this price raised some eyebrows.

Andy Cross: Yeah, I didn't know if you said "tidy" or "tiny." For Intel, it is relatively tiny. They have $17 billion in cash, and this is a $15 billion deal. Intel does $10 billion in earnings. So it's less than two years of earnings for Intel. So in the big picture, for Intel, which does $60 billion in sales, Mobileye is a really small fish. It was all about the growth, Chris, and thinking about where their market is going. Intel has been down this road before. They did make a very large acquisition of McAfee in 2011 for more than $8 billion, and now they're probably going to end up writing some of that down. They announced last fall that they're going to be selling off part of it to TPG at a valuation half of what they paid for it. So they'll write some of that down. They did make a big acquisition last year, for another $15 billion, of Altera. So these are two back-to-back $15 billion deals that we haven't yet seen; we'll have to see. It will take years for this to play out on the return for Intel shareholders.

Seth Jayson: Yeah, tough to figure out exactly what the price tag meant. I know Andy did some valuation work on this a while ago; so did I. When I did it, it looked like they would have to be selling their product into every car in the world, except there would have to be more cars selling every year than there actually are for it to even begin to make sense. So they're counting on that technology expanding a lot, or getting something else out of it, perhaps mapping data. Some people have been throwing that around, I don't know if I buy it.

Cross: Yeah, interesting. They paid 40 times sales, which is an extraordinary amount, but Mobileye has been growing at 50% a year, but five years ago, it was growing at 100% a year. So we have seen steadily declining rates. Again, plug it into the Intel family, and maybe they can get a better return for their buck. Remember, we were just talking interest rates earlier. Intel, that $17 billion is making nothing for Intel shareholders. So maybe they're thinking this is a better return on their money than what they can get from keeping that cash on the books.

Ron Gross: So they'll break even in about 20 years or so if the growth rate continues. That sounds awesome.

Cross: Yeah, if it doesn't work out, it is a relatively small write-off for Intel shareholders. Not a reason to make the acquisition, of course, and hopefully it doesn't work out for Intel shareholders, but it's a relatively little bet for Intel.

Jayson: You have to look like a player in self-driving; otherwise all the other kids are going to make fun of you.

Cross: Sure.

Gross: Uber has it.

Hill: Well, that's the thing. This is not a little start-up company. As I mentioned in my opening read, Mobileye has 70% of this market, and they're still not selling enough, to Andy's point, 40 times sales, they're still not making enough to make this look like anything other than an overpayment for their business.

Jayson: You're just not optimistic enough about the future.