Is Mobileye on the brink of a cliff?

Mobileye (NASDAQ:MBLY) has started an irrational rally back to its previous highs. The demand picture for the ADAS company is in question due to major inventory issues. After the stock rebounded sharply from its lows, analysts' investment thesis remains bearish as there are too many issues to pay a premium.

Starting in April, the market will obviously start to focus on normal ADAS chip demand for Mobileye. At the Morgan Stanley Technology and Telecom Conference in early March, the CFO discussed a clear sign that OEMs are working through EyeQ chip inventory issues through a rebound in orders.

The company announced production of 3.4 million chips in the first quarter, with customer commitments to double that number in the second quarter of 2024. Those numbers don’t really seem to be straying far from the numbers Mobileye was forecasting when it provided its original 2024 inventory warning.

ADAS expects excess inventory of up to 6-7 million EyeQ chips, mainly at Tier 1 OEMs. Mobileye sold 37 million chips in 2023 and forecasts only 31-33 million in 2023, while suggesting that the additional inventory was built up between 2021 and 2022.

Mobileye sold about 8.5 million units last quarter, which suggests that at least 5 million EyeQs were absorbed into inventory levels in the March quarter. With chip consumption expected to be 10 million units, an annual increase of about 20% compared to last year, inventory levels would be closer to normal levels.

At the Morgan Stanley conference, the CFO only said that chip shipments will roughly double this quarter, suggesting that shipments will reach 7-8 million units in the second quarter of 24. The big question is how Mobileye sales will jump in 2H to reach the expected full-year 2024 level of 31+ million units.

Mobileye expects to ship about 20 million EyeQ units in the second quarter, or 10 million units per quarter, and expects sales of SuperVision chips to increase by at least 75% this year, to between 175,000 and 195,000.

The biggest problem is that inventory numbers are not increasing. Mobileye expects unit demand to be flat this year, with 37 million EyeQ chips shipped in 2023, plus 31 to 33 million shipments and 6 to 7 million excess inventory consumption, for a chip consumption of about 37 to 40 million this year.

Mobileye continues to plan a strong product pipeline, with design wins expected to reach $7.4 billion in 2023, exceeding the $6.7 billion level in 2022. Even if chip shipments are weak in 2024, when last year's designs are fully realized, revenue from the ADAS business is expected to grow to 3.5 times the 2023 level.

The problem here is that problems predicting customer inventory levels reduce confidence in forecasts of auto deals lasting five to seven years. The slowdown in electric vehicles (EVs) looks set to further exacerbate weak demand for auto technology, with many of the advanced product wins in SuperVision and Chauffeur being EV-related, though the company said EyeQ chips were underpenetrated in EVs due to a lack of Tesla customers.

The key here is that Mobileye has never been based on chip shipments in 2Q24 vs. 1Q24. What will future sales growth look like once EyeQ demand normalizes and new products enter volume sales, with average system prices jumping from just over $50 today to $122 in the 2023 design win projection.

After a recent rebound, the stock has a market value of $26 billion and is targeting revenue of $2.7 billion in 2025. Mobileye's sales in 2023 will reach $2.1 billion, an annualized growth rate of less than 15%.

Even with the rebound, the stock still trades at 10 times its projected sales target for 2025. The market needs to understand that Mobileye's valuation has always been high, but public market investors have not yet profited from the stock since the Intel spinoff.

The gap between the stock and current price is about $32 to $44, but Mobileye would have to trade at 13x forward sales to get back to that price level, and recent inventory issues suggest the ADAS company does not warrant a premium valuation. The stock certainly sold off at previous highs due to questions about normal growth and demand from competitors.

Mobileye quickly resolved the EyeQ inventory issue. The problem is that the stock is already priced for perfection despite the ADAS company's severe inventory issues and questionable potential growth rates. A strong product pipeline is a positive, but Mobileye needs to execute before the stock becomes interesting at 10x forward sales targets.