Shares of autonomous driving solutions provider Mobileye (MBLY -5.50%) plunged 25.6% in Thursday trading, as of 3:20 p.m. ET.
The company, which is 88% owned by Intel (INTC -9.20%) but also has publicly traded shares on the Nasdaq, issued a press release this morning, saying that 2024 could be a very tough year.
The "bullwhip" comes for auto chip manufacturers
The semiconductor sector is notoriously cyclical and follows a pattern that seems to repeat itself no matter how experienced these chip companies become. First, there are shortages, either due to high demand or supply constraints, as which happened to the auto industry during 2021-2022. In those periods, customers tend to over-order, because they don't know if product will be available when needed. However, what inevitably happens is that when supply constraints ease and/or demand comes down (or both), chip customers (in this case, automakers) stop their orders, and a demand "air pocket" forms.
This happened to smartphone and PC chipmakers and memory suppliers in the aftermath of the pandemic in 2022. But while the auto chip sector was stronger for much longer following the pandemic, the same phenomenon appears to be happening to that sector now.
Earlier today, Mobileye announced that its fourth-quarter revenue would now be in the range of $634 million to $638 million, compared with prior guidance of $628 million to $648 million. While that mediocre result certainly wasn't great, the company's outlook for 2024 was much more worrying.
Management now expects 2024 revenue to decline about 9% to a range between $1.83 billion and $1.96 billion, and for adjusted non-GAAP (generally accepted accounting principles) operating income to fall by more than half, to a range of $270 million to $360 million.
It went on to explain:
As a result of our standard planning process for the upcoming year, including discussions with our Tier 1 customers to determine potential orders for 2024, we have become aware of excess inventory at our customers, which we believe to be 6-7 million units of EyeQ® SoCs. Based on our discussions, we understand that much of this excess inventory reflects decisions by Tier 1 customers to build inventory in the Basic ADAS category due to supply chain constraints in 2021 and 2022 and a desire to avoid part shortages, as well as lower than-expected production at certain OEMs during 2023.
Investors should also expect a particularly ugly first quarter, during which management expects revenue to decline 50% before recovering to about flat to up mid-single digits in the remaining three quarters compared to 2023.
Still, even the improved Q2-Q4 outlook is a far cry from the 24% growth analysts had been predicting for this year. Needless to say, it's a somewhat shocking turn of events that definitely justifies today's shellacking.
Where does Mobileye go from here?
At today's new lower valuation, Mobileye still trades at over 10 times its 2023 revenue figure. So the stock is by no means cheap, even after such a big decline.
That said, this looks like a mere inventory correction in a cyclical sector, but within a long-term secular growth trend toward more and more automation in vehicles over time. So, if one is still a believer in automation and Mobileye's strong position within that trend, it may be time to start following this story. An opportunity at a better entry point may in fact occur soon.
Interested investors should also tune into Mobileye's upcoming presentation at the Consumer Electronics Show in Las Vegas on Jan. 9 for more product detail, and potentially more commentary on the long-term picture.
