In the 1950s and 60s the car of the future was a flying car like the one piloted by George Jetson in the Hanna-Barbera cartoon series “The Jetsons”. Although flying cars have existed since the 1950s, they never caught on and most likely, never will.

Today the car of the future is a self- driving or fully autonomous vehicle. Well, it’s here now and more are on the way. Elon Musk’s Tesla has the “autopilot” feature and driverless cars from Google are successfully and safely (under approved test conditions) navigating the freeways of California, Florida, Michigan and Nevada and have racked up over 1.5 million miles.

How to play this exciting phenomenon? Mobileye!

Mobileye NV is a pure play in machine vision (necessary for a fully autonomous car) and a major player in Advanced Driver Assistance Systems (ADAS). It is headquartered in Israel and trades on NASDAQ in the US under the symbol MBLY. As of 8 June 2016, it has a market capitalisation of US$8.8 billion and an estimated market share of 70% in what may be the most powerful trend to hit the automotive industry as well as a significant piece of the nascent ADAS market.

Mobileye’s flagship product EyeQ key enabler for self-driving cars

Mobileye NV has developed leading edge automated driver assistance technologies. Its monocular vision platform helps drivers improve safety, avoid accidents, and revolutionizes the way individuals drive. The company’s products contain proprietary software algorithms bundled on its revolutionary EyeQ system-on-chip (or IC) and are integrated into vehicle electronic and control systems.

Mounted at eye level these systems recognize signage, roadway features, other vehicles, and of course objects such as cyclists, pedestrians and road hazards.

All of Mobileye’s proprietary image processing algorithms run on the EyeQ chip which took eight years to develop. The IC and software algorithms are sold as commercial products to original equipment manufacturer (OEM) customers. The company’s first clients were automotive manufacturers such as BMW, General Motors and Volvo, whose electronics suppliers integrated Mobileye’s technology into their cars, first as an optional accessory, and later as a standard fit in some new cars.

Now over 28 global auto manufacturers and suppliers are using Mobileye’s products, including Tesla, Audi, BMW, Toyota, GM, Ford, Honda, Peugeot Citroen, FCA (Fiat Chrysler) and Hyundai as well as the Chinese OEMs.

Mobileye technology is now available in over 160 car models and the company has flagged up to 250 car models by 2016.

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Source: Securities and Exchange Commission Mobileye 2014 Annual Filing

The road ahead for Mobileye: well positioned for growth in ADAS

On May 17, 2016 Mobileye and STMicroelectronics (STM-FR) announced that the two companies are co-developing the next (5th) generation of Mobileye’s SoC, the EyeQ®5, to act as the central computer performing sensor fusion for Fully Autonomous Driving (FAD) vehicles starting in 2020. The EyeQ5’s proprietary accelerator cores will be optimized for a wide variety of computer-vision and signal processing but will also include machine-learning tasks, including deep neural networks.

Mobileye is adding more and more OEMs and suppliers to its list of customers. For example in March 2015 Valeo (FR-FR), one of the world’s largest automotive component suppliers and a leader in driver assistance systems, entered into a technology sharing agreement which will use MBLY’s EyeQ product family in any front facing cameras. The two companies also plan to develop a joint product for fully automated driving.

ADAS demand will be driven as much by regulators as consumers over the next decade. The EU NCAP (New Car Assessment Program) is awarding higher ratings (4 & 5 stars) to cars with automatic emergency braking (AEB). It is expected that by 2017 all cars will need ADAS to achieve a 4 star rating. In the U.S., the National Highway Traffic Safety Administration recently announced it was adding two automatic emergency braking systems to its recommended safety features. Unofficially some 10 auto OEMs will add AEB by 2020 in the U.S.

While not a regulatory mandate, it is a strong endorsement. Consumers and automakers will take note. Mobileye is the clear leader in this application and is about to launch a camera-only full automatic braking (AEB) with Audi.

 

MBLY could achieve a 20% market share in global market by 2019

Needless to say, the ADAS addressable market (essentially the global automotive market) for Mobileye is huge and growing.

Mobileye sold 2.5 million units to OEMs in 2014 or roughly 4% of models manufactured in 2014. Conceivably Mobileye could capture up to 15-20% of the market over the next decade. The aftermarket (AM) is still a small (but profitable) percentage of total units sold. Mobileye believes they could have a 20% share by 2019 if they achieve a “high growth” scenario. (See below)

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Source: Securities and Exchange Commission Mobileye 2014 Annual Filing and Personal Database

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Source: Securities and Exchange Commission Mobileye 2014 Annual Filing and Personal Database

The team behind Mobileye

In 1999, Mobileye, was founded in Israel by Amnon Shashua (currently CTO and Chairman), Professor of Computing Science at Tel Aviv University and an expert in computer vision and machine learning, and Ziv Aviram (President, CEO and Director) an experienced Israeli entrepreneur. Today, each still owns 10% of the outstanding shares of the company.

The financials

Mobileye is a high growth company. It has grown revenues more than 12x from US$19.2 in 2011 to US$240.9 in 2015. Industry analysts expect Mobileye to grow earnings by +53% in 2016 and +25% in 2017. Consensus 2018 earnings give a forward multiple of 25X (as of close of 28 June 2016) which suggests that analysts believe future growth will normalize in the 20-25% range. However given that total ADAS penetration is still modest, many of these safety features will “trickle down” from premium brands to mass-market cars, and the absolute necessity for products like Mobileye to be part of fully autonomous vehicles, this multiple is probably too low. Mobileye went public in July 2014 priced at US$25.00 and was trading at US$60.00 by October of the same year. Subsequently the shares have retraced a good part of that gain as many IPOs usually do. It’s trading at US$40.00 today (close of 28 June 2016).

Potential risks to Mobileye’s growth story

Technology Adoption:
Mobileye depends on the acceptance of ADAS/autonomous vehicles and the use of machine vision technologies. Slower ADAS penetration, changes in regulation or better technology from competitors is a risk.

Reliance on STMicroelectronics as Sole Manufacturer:
Mobileye relies solely on STMicroelectronics N.V. to manufacture the EyeQ chips. STM manufactures chips at one factory in France.

Liabilities Related to ADAS/Autonomous:
The ADAS and autonomous markets are still in the earlier phase of development, and so there are no legal precedents. Who is responsible for incidents involving autonomous and ADAS equipped cars? The driver? The manufacturer? Mobileye could incur material costs because of alleged product defects, product liability suits, as well as warranty and recall claims.

Dependency on Founders:
Mobileye is highly dependent on the expertise and leadership of its founders, Professor Amnon Shashua and Mr. Ziv Aviram.

Macroeconomic:
Despite its attractive secular growth attributes, Mobileye still sells products into a cyclical industry that can be exposed to macro and/or geopolitical shocks.

Sources: Company reports, press releases, presentations, and SEC filings.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.