Mobileye (MBLY - Snapshot Report) is the leader in Advanced Driver Assistance Systems (ADAS) for cars, which use vision-based camera technologies to identify other vehicles, pedestrians, and road hazards and execute safety braking or other collision avoidance maneuvers.
On August 6, Mobileye reported strong sales and earnings growth for their Q2 and raised full-year 2015 guidance. Consequently, Wall Street analysts responded with a flurry of upward EPS estimate revisions.
The Zacks Consensus for 2015 vaulted 35% from $0.23 to $0.31 and 2106 EPS estimates rose 18% from $0.49 to $0.58.
While the valuation has many concerned as the stock trades at nearly 100X those 2016 projections, there are 2 primary reasons investors have been willing to pay that multiple: the growth rate and the tailwind of regulation.
50% Growth = PEG 2.0
Mobileye has relationships with over 20 automobile makers and is developing its totally-integrated EyeQ "system-on-a-chip" solutions for over 150 models of cars including those for GM, Ford, Honda, and BMW. Further, Mobileye’s technology has been selected for implementation in serial production of 237 car models from 20 OEMs by 2016.
This industry status as the premier, quality provider of a robust auto safety technology has most analysts projecting sales growth of at least 50% per year.
Since typical auto development and sales cycles can take 3-5 years, analysts are predicting this rapid growth will sustain until at least 2020, taking the company from $200 million in revenue this year to $1.5 billion on the topline in 5 years.
A minimum 50% growth rate would equate to a PEG ratio (PE over growth rate) of 2.0. With EPS projected to hit close to $1 in 2017, the stock will quickly move toward a PEG of 1.0 on a forward basis.
Regulation Will Drive Adoption
On the first quarter conference call this year, Mobileye management explained to analysts and investors that the demand for ADAS safety technology is being driven primarily by government regulation not consumer demand.
This was proven true in subsequent months when the US NTSB (National Transportation Safety Board) reiterated its guidelines and demands for safer cars, with an emphasis on the virtues of ADAS technology.
Over 80% of car accidents involved rear-end collisions. Tens of thousands of these accidents every year result in death or serious injury. While few people want a car that drives itself, it shouldn't be too hard to convince the average person of the value of having an automatic detection and braking system that could prevent the rear-end crash.
The regulatory tailwind is why Citi analysts called ADAS "the most important innovation in auto technology in 50 years."
Morgan Stanley on "Domination"
On August 17, Morgan Stanley analyst Ravi Shanker, one of the biggest Wall Street MBLY bulls, raised his price target on shares from $68 to $80.
"Beyond 2018, we expect MBLY to move out of the Execution phase into Domination of the vision space, as we transition from ADAS to autonomous capabilities. Our conversations with industry sources gives us high confidence that once MBLY already has the valuable real-estate in the car and trust of the OEM and end-consumer, it will be quite difficult to displace them. This should put MBLY in prime position for the upgrade cycle from ADAS to autonomous, which carries 3x the ASP (average selling price) and ~1500 basis point boost to gross margins."
Big Q2 Buyers
SEC 13F quarterly filings revealed last week that Morgan Stanley was among big money managers adding to their Mobileye stakes. The firm added 1.1 million shares in Q2 to bring their haul to nearly 3.2 million.
The biggest buyer of the quarter though was one of the most out-spoken investors, Ron Baron of Baron Asset Management. He bought 2.26 million shares to boost his holdings to over 3.5 million. Baron made headlines in June when he appeared on CNBC to share about his visit with Mobileye CEO Ziv Aviram in Israel.
Another notable buyer was Barry Rosenstein's JANA Partners with a starter position of just under 1 million shares.
And the biggest institutional "whales" just keep nibbling too with T. Rowe Price adding 1.25 million shares to boost their haul to 12.66 million, Ameriprise Financial grabbing 350k to inch closer to the 10 million mark, and monster Fidelity spending some pocket change on 200k shares to move their stake over 15.3 million.
Long-Term Story, Short-Term Volatility
Mobileye shares soared to new all-time highs above $64 early in the week after the Morgan Stanley view. But then the stock fell nearly 15% after a small Cayman hedge fund published their "short thesis" that "domination" is an exaggeration that doesn't support the valuation.
I'm betting that while the bears might make some money in the short run, the bull case will win in the long run as the institutions I follow keep their focus on a growth story where Mobileye will dominate a $5 billion industry even with just 40% market share.
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