Intel (INTC 5.41%) recently agreed to buy Moovit, an Israeli MaaS (mobility as a service) solutions company, for $900 million to strengthen its automotive unit Mobileye. Intel acquired Mobileye, which is also based in Israel, for over $15 billion in 2017.
Moovit's urban mobility app, which serves 800 million users in 102 countries, lets travelers plan trips by combining public transportation, bicycle, scooter, ride-hailing, and car-sharing services. Mobileye's ADAS (advanced driver-assistance systems) power vehicles from over 90% of the world's top automakers.
Intel claims the purchase brings Mobileye "closer to achieving its plan to become a complete mobility provider, including robotaxi services, which is forecast to be an estimated $160 billion opportunity by 2030." That long-term plan sounds promising, but is it the best use of $900 million?
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Why is Intel interested in driverless cars?
Intel leads the x86 CPU markets for PCs and servers, but it previously lost the mobile chip market to Qualcomm's (QCOM 0.91%) ARM-based chips. Connected and driverless cars are widely considered to be the next major computing platform after PCs and mobile devices, so many top chipmakers -- including Intel, Qualcomm, and NVIDIA (NVDA 2.94%) -- are pivoting toward automotive chips.
To stay in that race, Intel paid a high price for Mobileye. It also acquired computer vision companies Itseez and Movidius, produced Atom chips for cars, and co-developed an autonomous driving platform with industry heavyweights like BMW, Fiat Chrysler, and Delphi.
Simply put, Intel wants to dominate the connected vehicle market in the same way it conquered PCs and servers. It believes merging Mobileye's ADAS technologies, its EyeQ computer vision chips, its Atom CPUs, and other technologies with Moovit's users could widen its moat against Qualcomm, NVIDIA, and other challengers.
But Intel's automotive business isn't generating much revenue yet. Mobileye generated $879 million in revenue last year, but that only accounted for 1% of Intel's top line and a fraction of its purchase price. So was buying Moovit to expand Mobileye's ecosystem the best way for Intel to deploy its capital?
Assessing Intel's priorities
Intel generates more than enough cash to cover its capital needs -- that's why it announced a massive $20 billion buyback plan last year. It bought back $7.6 billion in shares over the past two quarters, but recently suspended all its future buybacks.
That move seemed prudent, and suggested Intel would prioritize its near-term challenges -- including its ongoing chip shortage and rising competition from AMD (AMD 3.46%) -- over longer-term goals like driverless cars. But Intel still has enough cash to simultaneously tackle all those challenges.
Intel generated $18.2 billion in free cash flow over the past 12 months, and it FCF rose in recent years as it sold a steady stream of PC and data center chips. Its chip shortages left both markets to vulnerable to AMD, but Intel is raising its capex to resolve those issues.
Source: YCharts
Intel invested $16.2 billion in capex last year, and plans to boost its capex to $17 billion for fiscal 2020 -- and allocate over half of that total to investments in the fab space and 7nm and 5nm equipment. In the first quarter, Intel spent $3.3 billion on capex, and declared it would boost its production capacity by a mid-20% rate for the full year to resolve its chip shortages.
During the conference call, CEO Bob Swan stated: "We remain on track to add sufficient wafer capacity this year so that we meet market demand and restore our PC unit inventory to more normal levels." Therefore, Intel's $900 million investment in Moovit is significant, but it probably won't impact its long-term capex goals.
The bottom line
Intel is generating enough cash to fix its chip shortages and counter AMD, and its purchase of Moovit could improve its business more than massive buyback plans. In short, this deal probably won't move the needle for Intel anytime soon, but it also shouldn't distract Intel from its other near-term priorities.
