Mobileye might make a good investment for investors who are not risk-averse, but with the potential for huge payoffs comes a such a massive pile of risk that it might be too much for even those who typically can stomach quite a lot. Don’t forget: Citron Research called this company the “short of the year” just last month.
According to analysts at one firm, the sensor maker has the potential to quadruple its earnings over the next couple of years, but the risks it faces will only grow from here on out.
Morgan Stanley slashes price target for Mobileye
In a report dated Jan. 14, Morgan Stanley analyst Adam Jonas said he has slashed his price target on Mobileye from $80 to $57 per share but maintains his Overweight rating on the stock. Through 2018, he expects the automotive sensor maker to “grow into its valuation” as it increases its penetration of the ADAS market.
However, in the long term, he thinks the company may have a target on its back as bigger tech players seek to steal chunks of the market for autonomous driving components. These bigger players could post a threat to Mobileye’s “ultimate outcomes,” he wrote, particularly in terms of market share, margins and terminal growth rate.
Looking into the long term
In addition to adjusting his base case the Morgan Stanley analyst said he also slashed the valuations on his bull and bear cases, with the former’s target falling from $150 to $90 and the latter’s target dialing back from $30 to $20 per share.
He said his adjustments are “entirely related” to his forecasts for Mobileye’s margins, market share and terminal growth beyond 2018. His new price targets take into consideration potential competition from “non-traditional players set on disrupting the automotive ecosystem.”
He noted that recently Mobileye shares have seen a lot of volatility as investors consider just how legitimate potential new competitors might be and how much of a threat they pose. The analyst said CES brought fresh concerns because numerous companies demonstrated their own technologies in the area of autonomous driving. From automakers to suppliers and semiconductor firms, there was a long list of parties interested in the market and making plans to enter it and play a major role in it.
Threat from Google
Meanwhile we’ve been hearing more and more often about Google’s efforts in the area of self-driving cars. The company has been working on this technology for years, even advancing to the testing phase on public roads. At this point, it now looks like Google is close to “deploying small roves of self-driving cars with its own solution.”
Jonas added though that while Google is Mobileye’s biggest competitor, it also isn’t a competitor at all, concurrently. The reason is because the tech titan is following a different approach to autonomous driving. Also it has done an excellent job of keeping the details of its technology under wraps.
Tesla a threat too
Further, Tesla Motors already has gone beyond the testing phase with its first efforts in autonomous driving by pushing out the Autopilot mode to the Model S. The automaker did dial back the feature on concerns about accidents and risky drivers, but the fact remains that it has some advanced form of semi-autonomous driving technology available to owners of its cars.
Tesla has been moving this technology forward, making its software and mapping more sophisticated through the machine learning that’s also included in its Model S sedans. The automaker has already logged 1.6 billion miles, notes Jonas, and down the road, it could bring development of its sensors in-house. The good news for Mobileye currently though is that he sees little risk of any other automakers (possibly excluding German automakers) moving their sensors in-house.
“While we continue to believe that Mobileye is in pole position to lead the next wave of advancements, we have revised our forecasts to show a greater awareness of the competitive landscape that is taking form,” Jonas and team wrote.
Another area in which Tesla could pose a threat to Mobileye is mapping, as the Autopilot mode currently crowdsources real-time data from drivers. The EV maker is already doing this, but Mobileye just announced its intentions at CES earlier this month. Google also knows a lot about mapping, having been doing it for years before Tesla started it.
The near term less of a concern for Mobileye
He added that currently the sensor maker enjoys extremely high barriers to entry, making it difficult for competitors to enter the market for vision-based ADAS autonomous driving systems as sold by “conventional auto firms.”
He also emphasized repeatedly that it is the long term he is concerned about and that he sees plenty of room to debate what Mobileye’s future looks like and what its barriers to entry into a “fully-autonomous ecosystem commercialized by large tech hardware and software firms.”
On one hand, Jonas said that the argument could be made that the sensor maker’s value is inversely correlated with its average customer’s software expertise. This means that it’s not too soon for investors to think about the many outcomes and high levels of risk that await it down the road. But while he sees less room for upside now than he did previously, he still sees room for 51% upside as a result of the near term visibility of earnings growth and cash flow generation.
He added that at least for now, Mobileye is still the only pure play in autonomous cars and software, which are “two of the fastest growing and most powerful trends in autos today.”
Shares of Mobileye tumbled by as much as 7.89% to $31.18 per share during regular trading hours today.