Mobileye Global (MBLY -5.50%) and Wolfspeed (WOLF 5.55%) represent two different ways to invest in the development of electric, connected, and driverless vehicles. Mobileye is the world's leading developer of advanced driver assistance systems (ADAS), which help drivers park their cars, stay in the right lane, and use adaptive cruise control features. These systems are powered by its own EyeQ computer vision chips.
Wolfspeed is the world's leading manufacturer of silicon carbide chips, which can operate at higher voltages, temperatures, and frequencies than traditional silicon chips. That resilience makes them well-suited for short-length LEDs, lasers, 5G base stations, and military radars. Wolfspeed also sells silicon carbide materials to electric vehicle (EV) makers for the production of batteries and powertrains.
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Mobileye's stock has stayed roughly flat year to date, but Wolfspeed's stock has plunged nearly 40%. Let's see why the former outperformed the latter by such a wide margin -- and if that trend will continue over the next few quarters.
Mobileye faces a tough cyclical slowdown
Intel bought Mobileye in 2017 to expand its automotive chip business, but it spun off part of its stake through an initial public offering (IPO) last October. Mobileye's revenue only rose 10% in 2020 as the pandemic disrupted the automotive market, but grew 43% in 2021 as those headwinds passed.
Supply constraints at STMicroelectronics -- which manufactures all of Mobileye's chips -- temporarily curbed its growth in the first half of 2022, yet its revenue still rose 35% for the full year.
But in the first half of 2023, Mobileye's revenue declined 7% year over year. That slowdown was caused by inflation, rising interest rates, the decelerating growth of China's EV market, and other macro headwinds. Fierce competition from Qualcomm and Nvidia, which both integrate their own automotive chips into their autonomous driving platforms, could be exacerbating that pressure.
Mobileye expects its revenue to only rise 10% to 13% in 2023 as it navigates those challenges. It's been reining in its spending to cope with that slowdown, but it still expects its adjusted operating margin to drop from 37% in 2022 to 29% in 2023. Analysts expect its revenue to rise 13% this year as its adjusted earnings per share (EPS) drops 11%.
That near-term outlook is grim, but Mobileye's growth could accelerate again once the macro environment improves. Its dominance of the ADAS market gives it a firm foothold in the driverless vehicle market, which Mordor Intelligence estimates could still grow at a compound annual rate of 23% between 2022 and 2027.
Wolfspeed still has a lot to prove
Wolfspeed was known as Cree until late 2021, when it rebranded itself to prioritize its sales of Wolfspeed-branded silicon carbide products. It also divested several of its non-core product lines to further streamline its business.
Wolfspeed's revenue only rose 12% in fiscal 2021 (which ended in June 2021) as the pandemic disrupted China's EV sector and the global semiconductor market. But its revenue surged 42% in fiscal 2022 as its end markets recovered and more companies integrated silicon carbide chips into their products.
But in fiscal 2023, Wolfspeed's revenue only rose 24% as the macro headwinds throttled the market's demand for silicon carbide chips and materials again. Analysts expect that slowdown to drag on with just 15% revenue growth in fiscal 2024.
As Wolfspeed's growth cools off, its costs are rising as it ramps up its production of 200 millimeter (mm) chips at its new silicon carbide plant in upstate New York. It also recently broke ground on an even larger 200 mm plant in North Carolina. However, it expects its production of 200 mm chips to pay off over the long run and reduce its overall die costs by about 50%.
That plan sounds promising, but Wolfspeed remains unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP (adjusted) measures. All of that red ink -- combined with its sluggish growth and rising costs -- are weighing down its stock.
The better buy: Mobileye
Mobileye and Wolfspeed trade at 13 times and 5 times this year's sales, respectively. Wolfspeed might seem like the cheaper play, but its lack of profits and an uncertain near-term outlook for the silicon carbide market makes it riskier than Mobileye.
Mobileye's stock won't soar anytime soon, but its prospects should brighten as the macro environment improves and the auto market recovers. Therefore, I believe Mobileye will continue to outperform Wolfspeed for the foreseeable future.
