Volkswagen Scandal Proves Analysis Of Mobileye: Citron

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How The Volkswagen Scandal PROVES Citron’s Analysis Of Mobileye by Citron Research

Citron Lowers Near Term Target to $20: See GPRO and AMBA

The biggest story in the business world over the past week has been Volkswagen’s emissions cheating scandal. But the analysis has been overlooked by the media. The looming question not dissected in the press, nor answered by the automotive markets analyst community is not WHAT Volkswagen did … but WHY did they do it?

All you have to know was explained by Michael Cusumano, Distinguished Professor of Management at the Sloan School of Management and the MIT Engineering Systems Division, former Editor-in-Chief and Chairman of the Sloan Management Review, when he recently commented:

“No one is putting a gun to their head to compel this bad behavior … Yet it’s difficult to make money otherwise. … It’s hard to increase market share. Profit margins are tight.” – Michael Cusumano, professor at Sloan Business School, the Massachusetts Institute of Technology

This disastrous conspiratorial decision by Volkswagen top management was simply a reflection of the brutal competitive realities of the auto industry — notorious for razor thin margins and withering competition — shaving profits throughout the supply chain — to the point where almost anyone or anything can become collateral damage.

Does this seem like an industry that will EVER tolerate Mobileye  maintaining EBIDTA margins of 60% until 2025, while EVERY tech supplier to the auto supply chain struggles to post 10%? There is one analyst on Mobileye who at least acknowledges this risk:

“The auto supply chain structure may ultimately turn from being a positive to a negative for Mobileye. We believe these supplier partners have ample time to invest in similar technologies to bridge technology gaps. Further, given that these systems are often being provided by suppliers with massive incumbent footprints in the vehicle, competitors could certainly become more price aggressive. Finally, OEMs do not like to sole-source, which could limit Mobileye’s pricing leverage.” — Pacific Crest Analyst’s Note on Mobileye

Anatomy of the Automotive Supply Chain

Volkswagen Scandal Proves Analysis Of Mobileye: Citron

The bulk of Mobileye’s volume will never come from selling product direct to automakers. Their ADAS system-on-a-chip is sold predominantly to Tier 1 suppliers who integrate it with their own modules to create ready-to-install components in a car on an assembly line.

These same Tier 1 suppliers are also Mobileye’s direct competitors (see references to Denso, Bosch, and Continental below.) The Volkswagen debacle kills the theory that Mobileye can sustain monopoly-level margins and massive growth at the same time…. This industry is ALL about saving money wherever it is possible and looking for every angle every year, every day.

The same Pac Crest analyst understood this point enough to write:

“We believe that expecting Mobileye to improve its leverage with tier-1 supplier partners in the future assumes that tier-1 suppliers’ ADAS investments will not be successful. Not a great bet, in our view. Mobileye has quietly lost two partners in the past year (Autoliv and Gentex), with others working on their own in-house developments.” — Pacific Crest Analyst’s Note on Mobileye,+Pacific+Crest+Starts+at+Sector+Weight/10554724.html

Absurd: Mobileye, a Supplier to the Auto Industry, is making Qualcomm’s 1999 valuation blush …

Citron believes Mobileye is the most overpriced tech stock (in the billions) in the Nasdaq’s history. We are aware this statement sounds like an overreach, but our analysis confirms that is the truth … and it’s not even close.

For those of you who faced the 1999 stock market, Qualcomm, the mother of all fabless semiconductor companies, is etched in our brains. The stock went completely parabolic nutso for the whole year as the world absorbed the game-changing potential of their technology and the patent moat they had built around it. Forget about ADAS – this was the cell phone and wireless technologies…. IT WAS BEYOND HUGE. All of this unfolded amidst a massive tech and internet stock bubble. But during this whole interval, Qualcomm never even came close to being as overvalued as Mobileye now is … not even by half or a third.

Volkswagen Mobileye

While not fabless, but still semiconductor, note that Intel never traded higher than 14.3x sales at Apr 1, 2000….the absolute peak, all the while the market was lit up by the imminent appearance of a computer in every home.

Citron will explain below how this turned out for Qualcomm – as we describe exactly how it will end for Mobileye. Trust us, it didn’t turn out any better for Intel.

Volkswagen Mobileye

Despite becoming a legitimate 15+ year success story, continuing to innovate and hold its lead in the cell-phone ASIC industry, Qualcomm stock never recovered the highs of that period (even on a dividend-adjusted basis.) To this day, Intel remains below half its peak valuation of 2000.

This demonstrates a tech company with unassailable accomplishments and an unparalleled record of execution dominating its space always presents the risk for investors of never recovering the valuation from its “hype phase”.

So how exaggerated were Qualcomm’s metrics at the height of its run and afterward? And how do these compare to Mobileye’s at the present time, and in the analyst models for the next 15 years?

Historical EBIT for Qualcomm (adjusted for licensing rev)

Volkswagen Mobileye

Throughout its entire history, despite its unique IP technology for cell phones, Qualcomm never notched EBIT margins over 40%, and ultimately couldn’t sustain anything over the 20%’s.

To compare to Mobileye, we begin at 2013, when the company turned profitable. Notice now Morgan’s EBIT estimates soar above 50% — a level Qualcomm never achieved, and never return to earth below 50% ever again, even through 2029… according to Morgan Stanley’s crystal ball.

Volkswagen Mobileye

Citron’s Response to the Mobileye Analysts: Morgan Stanley proves themselves Wrong.

Since the initial Citron report on MBLY was presented, we have reviewed responses from Barclays, Citi and even a conference call from Morgan Stanley with great interest. We could write 30 pages tearing apart the research from these firms, detailing why it is devoid of any intellectual honesty, and making examples of recent similar analyst hype-phase disasters like Mellanox and DDD. But we do not want to bore our readers. We are open to a debate on the topic with any of those analysts anytime. Instead, we will focus on the one firm considered the “hammer” in Mobileye, and PROVE the lack of integrity in the research: Morgan Stanley.

In part 1, Citron referenced a Blue Paper — penned by Morgan Stanley just eight months before MBLY’s IPO –on the future of autonomous driving. There was virtually no notice given to Mobileye. Than the IPO comes and now Morgan Stanley (after a few banking fees) is the blind cheerleader.

Citron presents some chronology of the M.S. research and the basis behind the current price targets that are going to make the analyst wish he could channel the late, great Yogi Berra, and utter: “I never said most of the things I said…”

See full PDF below.

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The post above is drafted by the collaboration of the Hedge Fund Alpha Team.

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