It is a busy week for Elon Musk – Tesla Motors Inc (NASDAQ:TSLA) says it will need to raise more money for its new plans (shocker), the Gigafactory – by some metrics the largest manufacturer in the world is opening soon and Musk is making wild predictions about revenue on Model 3 sales (although little about earnings), and Tesla and Mobileye NV (NYSE:MBLY) parted ways yesterday in news which caused MBLY stock to tank before a bit of a recovery. With all the news it is hard to cover everything so below we will focus on the MBLY news and what it means for both companies. Many analysts note that Tesla is a small percentage of revenue for Mobileye so why focus on either? Because the news could be important and these companies are on the verge of great feats which will be remembered centuries from now or total failure depending on your point of view. Below is a brief summary of what analysts are saying.
The big story was that Mobileye revealed it will not supply Tesla beyond the EyeQ3 chip. We note that both Mobileye and Tesla staked claim to being the party that separated the relationship. Our sense from talking with industry sources is that the relationship between Mobileye and Tesla has been headed to this outcome for some time. We believe Tesla would like to push the envelope more with autonomous features and increasingly with their own algorithms. Our best guess at this point (based on our checks) is that Tesla will eventually migrate to a hardware solution from
Bosch with processing done by Nvidia using internally-generated Tesla algorithms.
• We believe the stock’s reaction to the Tesla news was an overreaction because 1) Tesla comprises about only 1% of Mobileye’s revenue today 2) Mobileye said that of its $1.1BN 2019 revenue target, Tesla contributes ~2% (or ~$17MM on 350K cars). Tesla is arguably Mobileye’s most technologically advanced customer and has helped raise Mobileye’s profile. At the same time, given that Tesla is such a small customer in terms of revenue contribution, the way Mobileye’s stock is coupled with Tesla is not always justified. Bottom-line, we believe the industry can support multiple players, including captive OEM solutions.
Mobileye shares fell -8% yesterday vs. the average auto parts supplier +1.8%, following the announcement that the firm is discontinuing its relationship with Tesla, overwhelming the impact of stronger 2Q earnings and an increase to full year guidance (which likely initially caused a positive reaction pre-market). Mobileye announced that while it may continue to supply Tesla with its current EyeQ3 chip for the Autopilot application, the relationship will not extend to its next generation EyeQ4 chip. Mobileye indicated that, given some of the incremental autonomous functionalities Tesla was looking to pursue in the future while also desiring to have greater control on the use of the designed technology, that in the interest of safety Mobileye has decided to not pursue additional business with Tesla. While it is unclear at this stage whether Mobileye’s EyeQ3 chip will be in use on the Model 3, Tesla confirmed separately that the Mobileye announcement does not change the timing of the Model 3 launch. We estimate shipments to Tesla account for only ~1% of MBLY’s total OEM shipments.
We see few positive catalysts until the Model 3 launch late next year. Until then, we see risks around production targets (500k by ’18), Model S demand & TSLA Energy growth. We are cautious on the SCTY deal as synergies seem limited. The NHTSA & SEC investigations are also still on-going. Long term, we remain cautious about Model 3 profitability. While the recent secondary provides the capital for the production ramp, we still expect TSLA to burn ~$1.5bn in FCF in 2016 and ~$630m in Q2.