Is Mobileye Global Stock a Buy Now?

Mobileye's (MBLY -5.50%) stock dropped 6% on July 27 after the producer of advanced driver-assistance systems (ADAS) and computer vision chips posted its second-quarter earnings report. Revenue declined 1% year over year to $454 million but beat analysts' estimates by $3 million. Adjusted net income dropped 14% to $135 million, or $0.17 per share, which still beat the consensus forecast by $0.05.

Mobileye cleared Wall Street's low bar, but the bulls weren't impressed. Should investors go against the herd and still buy it as a long-term investment? Let's review its business model, near-term challenges, and valuation to decide.

Image source: Getty Images.

Mobileye faces a cyclical slowdown

Mobileye controls nearly 70% of the global ADAS market. Its systems use cameras, sensors, and its own EyeQ computer vision chips to help drivers park their vehicles, cruise along single lanes, and access other semi-autonomous features. The latest "SuperVision" version of its ADAS platform even supports hands-free navigation capabilities.

Intel (INTC -9.20%) bought Mobileye in 2017 to expand into the automotive market but spun off the company in an initial public offering (IPO) last October to streamline its business and raise fresh cash for its foundry upgrades. Intel still owns about 88% of Mobileye's outstanding shares, and the two companies remain strategic partners in the auto market. However, Mobileye outsources the production of its EyeQ chips to its longtime-partner STMicroelectronics instead of Intel.

Mobileye's growth rates have been lumpy over the past three years. Its growth cooled off in 2020 as the pandemic disrupted the automotive sector but accelerated in 2021 as those headwinds dissipated. It continued to grow in 2022, but supply chain constraints at STMicroelectronics throttled its supply of EyeQ chips throughout the first half of the year.

Data source: Mobileye. YOY = year over year.

That deceleration was exacerbated by inflation, rising interest rates, slower electric-vehicle (EV) sales in China, and other macro headwinds for the auto sector. The company also faces tough competition from other chipmakers like Qualcomm and Nvidia, which have both been bundling their automotive chips into their own autonomous-driving platforms.

All of those challenges caused Mobileye's revenue to decline 1% year over year in the first quarter of 2023. During that quarter, its total system shipments declined 2% year over year (but grew 2% sequentially) to 8.3 million. The average price of those systems dipped 1% year over year (and fell 4% sequentially) to $51.70.

How long will that slowdown last?

At the end of 2022, Mobileye predicted its revenue would rise 17%-22% in 2023. But it reduced that full-year forecast to 10%-13% growth in the first quarter of 2023 and reiterated the same glum outlook during its second-quarter report. Analysts currently expect Mobileye's revenue to rise 12% to $2.1 billion this year.  

But in 2024, they expect the company's revenue to rise 31% to $2.75 billion as the macro environment improves and the automotive market expands. Mordor Intelligence expects the driverless-vehicle market to grow at a compound annual rate of 23% between 2022 and 2027, so Mobileye could still be a great way to ride that secular trend. But with the company's enterprise value of $33.3 billion, a lot of that growth potential has already been priced into its stock at 16 times next year's sales. Qualcomm, which faces its own cyclical slowdown in the smartphone market, trades at just 4 times this year's sales.

Trying to stabilize margins

As Mobileye braces for a slowdown, it's reining in spending to stabilize margins. Its adjusted operating margin still fell year over year from 40% to 31% in the second quarter but expanded sequentially from 27% in the first quarter.

The company also lifted its adjusted operating profit outlook for the full year from $548 million-$577 million to $600 million-$631 million. But the midpoint of that revised forecast would only trickle down to an adjusted operating margin of 29% for the full year -- which represents a steep decline from its adjusted operating margins of 37% in 2022 and 40% in 2021.

Analysts expect Mobileye's adjusted earnings per share (EPS) to decline 19% this year, then rise 31% in 2024 if the automotive-chip market recovers. Unfortunately, the company's stock still isn't cheap, relative to those wobbly estimates at 63 times forward earnings.

Is it the right time to buy Mobileye?

Mobileye should continue to grow as the connected and driverless market expands, but its near-term slowdown and high valuation make it a risky investment right now. That's probably why Intel sold $1.5 billion of its post-IPO shares earlier this year.

The company won't win back the bulls until its revenue growth accelerates with rising shipments, higher average selling prices, and expanding operating margins again. For now, I'd avoid Mobileye and buy more stable chip stocks at lower valuations.