Is It Too Late to Buy Mobileye Stock?

Mobileye's (MBLY -5.50%) stock plunged 25% on Jan. 4, after the automotive chipmaker posted its preliminary full-year results for 2023 and outlook for 2024.

For the full year, it expects its revenue to rise 11% as its adjusted operating income grows 0%-1%. That matched the chipmaker's most recent outlook, which called for 10%-12% revenue growth and a 7% decline to 1% growth in adjusted operating income, but it had already reduced its top-line guidance throughout 2023.

Image source: Getty Images.

But for 2024, Mobileye expects to generate just $1.83 billion to $1.96 billion in revenue, which would mark a 6%-12% decline from the midpoint of its 2023 outlook and broadly miss analysts' expectations for 21% growth. It expects its adjusted operating income to drop 45%-59%, which implies it will miss analysts' expectations for 1% adjusted EPS growth.

To make matters worse, Mobileye expects to start the year off on the wrong foot with a year-over-year decline of "approximately 50%" in the first quarter as its adjusted operating income turns negative. It expects those figures to improve sequentially over the following quarters, but that chilly outlook still spooked the bulls. Should investors consider nibbling on Mobileye after that steep pullback, or is it too late to buy this fallen stock?

Here comes the cyclical downturn

Mobileye controls nearly 70% of the world's advanced driver assistance system (ADAS) market. These systems use cameras, sensors, and Mobileye's own EyeQ computer vision chips to add assisted parking, single-lane cruising, and other semi-autonomous features to cars. The newest "SuperVision" version of its system supports hands-free navigation capabilities and the future development of fully autonomous vehicles.

Intel acquired Mobileye in 2017, but it spun off part of its stake in an IPO in October 2022 to streamline its business and raise fresh cash. Intel still owns 88% of Mobileye's shares, but Mobileye actually outsources the production of its computer vision chips to STMicroelectronics instead of Intel's foundries.

Mobileye's dependence on the auto sector exposes it to lots of macro headwinds. Its revenue growth slowed down in 2020 as the pandemic disrupted the auto sector, but it accelerated again in 2021. It continued growing in 2022, even as it struggled with supply chain constraints at STMicro, but suffered another slowdown in 2023 as inflation, rising rates, and strikes drove automakers to rein in their spending. Its sales in China also slowed down as the country's red-hot EV market cooled off.

Data source: Mobileye. YOY = Year-over-year.

Mobileye expects that slowdown to deepen in 2024 as its shipments of EyeQ chips drop 11%-16% to 31 million units and offset its 75%-95% growth in SuperVision shipments. It blames that slowdown on an "excess inventory" of approximately "six to seven million" EyeQ chips among its customers -- many of whom had accumulated far more chips than they needed throughout 2021 and 2022 to insulate themselves from the supply chain constraints.

That supply glut was exacerbated by Mobileye's decision to ramp up its orders of EyeQ chips from STMicro in the second half of 2022 after struggling to secure enough chips in the first half of the year. As Mobileye ended up with too many chips, many automakers reduced their production of new vehicles to cope with the macro headwinds.

Its margins are crumbling

As Mobileye's revenue growth stalls out, its margin is shrinking. Its adjusted operating margin fell from 40% in 2021 to 37% in 2022, and it expects that figure to drop to just 33% in 2023 and a midpoint of 17% in 2024.

Mobileye's margins will remain under pressure until it resolves its inventory issues and the macro environment stabilizes. However, its recovery could still be hampered by stiff competition from other computer vision chipmakers such as Ambarella, Qualcomm, and Nvidia.

Its stock is still too expensive

Mobileye's stock was rightfully crushed in response to its grim outlook, but it still isn't cheap. With an enterprise value of $26.8 billion, it's still valued at 14 times the midpoint of its its revenue guidance for 2024. For reference, Intel, which is expected to generate 13% revenue growth in 2024, trades at less than four times that estimate.

Faced with all of these problems, I think it's too late to buy Mobileye's stock. Its stock will probably bounce back after its cyclical downturn ends, but it could easily be cut in half in this choppy market before it doubles again. Investors should stick with cheaper chip plays like Intel or Qualcomm instead of betting on Mobileye's eventual recovery right now.