Mobileye (MBLY -5.50%) and Texas Instruments (TXN 1.27%) represent two ways to invest in the growing market for automotive chips.
Mobileye is the world's leading developer of advanced driver assistance systems (ADAS), which use a mix of sensors, cameras, and its own EyeQ computer vision chips to support assisted parking, adaptive cruise control, and other semi-autonomous driving features.
Texas Instruments produces digital light processing (DLP) chips for dashboards and headlights, radar sensor chips for ADAS platforms, and other types of automotive chips. It also manufactures a wide range of analog and embedded chips for the industrial, enterprise systems, communication equipment, and personal electronics markets.
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Over the past 12 months, Mobileye's stock fell 6% as TI's stock dipped 7%. During the same period, the Philadelphia Semiconductor Index rallied 48%. Let's see why both chip stocks slumped -- and if either one is a worthwhile turnaround play.
What happened to Mobileye?
Mobileye's revenue rose 43% in 2021 as the pandemic's height passed and automakers resumed their production of new vehicles. The company's revenue grew another 35% in 2022, even as STMicroelectronics -- which manufactures all of its EyeQ chips -- grappled with supply chain constraints throughout the first half of the year.
But for 2023, Mobileye only anticipates 11% revenue growth. It expects that slowdown to intensify with a 6% to 12% revenue decline in 2024. That abrupt deceleration was caused by a combination of macro headwinds and supply imbalances.
Inflation, rising interest rates, and union strikes all throttled Mobileye's growth by driving major automakers to rein in their spending over the past year. Its sales in China also slowed down as the country's electric vehicle (EV) market cooled off.
To make matters worse, many automakers had accumulated Mobileye's EyeQ chips throughout 2021 and 2022 to cope with supply chain constraints. As a result, Mobileye now estimates that its top customers are holding an excess inventory of about "6 to 7 million" EyeQ chips -- and it doesn't expect to resolve that supply glut anytime soon.
As Mobileye's revenue growth stalls out, it expects its adjusted operating margin to drop from 37% in 2022 to 33% in 2023 and a midpoint of 17% in 2024. Analysts expect its adjusted earnings to rise just 1% in 2023 and decline 34% in 2024. Those are dismal growth rates for a stock still trading about 78 times forward earnings.
What happened to Texas Instruments?
Texas Instruments' revenue rose 27% in 2021 as the pandemic-related headwinds dissipated. However, its revenue rose 9% in 2022 -- and analysts expect a 12% decline in 2023, followed by just 1% growth in 2024.
That slowdown was mainly caused by macro headwinds. Over the past few quarters, the weakness of TI's industrial and communications equipment markets offset the growth of its automotive, personal electronics, and enterprise systems markets. It also continued to face challenges in China, where the country's industrial sector recovered at a slower-than-expected rate over the past year.
On the bright side, TI isn't dependent on the PC market, which suffered a severe post-pandemic slowdown, or the tech war between the U.S. and China -- since the company only produces lower-end analog and embedded chips instead of higher-end CPUs and GPUs. However, TI still generated about 40% of its revenue from the industrial sector in 2022, and many of those customers are still struggling in this tough macro environment.
But instead of cutting costs to deal with that slowdown, TI is ramping up its spending on upgrades for its plants and its transition from 200mm to 300mm wafers -- which could reduce the costs of its unpackaged parts by roughly 40%.
Analysts expect that mix of slowing revenue growth and higher expenses to reduce its operating margin from 51% in 2022 to 42% in 2023 and 39% in 2024. They expect its earnings to decline 25% in 2023 and drop another 7% in 2024. Those near-term growth rates look dismal, and its stock doesn't seem like a screaming bargain at 25 times forward earnings. Nevertheless, its forward dividend yield of 3.1% might limit its downside potential in this choppy market.
The better buy: Texas Instruments
I'm not a fan of either of these chip stocks right now. But if I had to pick one over the other, I'd definitely stick with TI because it's better diversified, has a wider moat, and isn't suffering from a severe supply glut. TI stock also looks more reasonably valued relative to its near-term growth, and pays a reliable dividend. It's impossible for me to recommend buying Mobileye unless it makes meaningful progress toward resolving its inventory issues.
