Markman Capital Insight

Buy Intel To Drive Away With MobilEye Spin-Out

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Despite all of the talk about excessive valuations for growth stocks, a batch of extremely promising 2022 initial public offerings are on the docket.

At the Consumer Electronics Show last week MobileEye showed off impressive plug-and-play technology for autonomous vehicles. The Israeli computer vision company is readying its IPO for the first half of this year.

Investors should get ahead now by buying Intel (INTC), its parent company.

MobileEye is a pioneer in the quest for fully autonomous vehicles. Engineers have been tinkering since 2004 with cameras, digital mapping software and bespoke microprocessors.

Back when it was a public company the first time, MobilEye was one of my first picks for this letter back around 2014 – and a big money-maker. Since then, executives have worked with everyone  from Tesla (TSLA) and Volkswagen (VWAGY), to Ford (F) and BMW. Through the end of 2021 the company has shipped 100 million of its EyeQ processors.

The latest incarnation, the EyeQ Ultra, is a monster. Based in the 5-nanometer process, the chip has 64 cores that are capable of 4.2 teraflops. Speaking at the virtual CES conference, Amnon Shashua chief executive said EyeQ Ultra, and the full electronics needed to run autonomous vehicles will be available at scale in 2025 for less than $1,000.

The idea of AV-on-a-Chip is nirvana for legacy automakers.

Bolting on an inexpensive system that will match state-of-the-art Teslas eliminates a key competitive disadvantage.

During 2021 MobileEye announced 41 new design wins with 30 different automobile original equipment manufacturers. These deals will account for 50 million vehicles and 188 new models going forward.

Honda Motors used MobileEye sensors in March 2021 to launch the first level 3 system in Japan. Months later BMW and Volkswagen launched cutting edge advanced driver assistance systems powered by MobileEye. And Geely, a major Chinese automaker began shipping a SuperVision system that uses 11 cameras and two 5 EyeQ processors.

The breadth of the MobileEye portfolio ensures it will be a big player in the future of AVs. As this tech finds its way into more vehicles the company will begin building the type of data hoard that helped Tesla improve its AV technology so rapidly.

This will be a powerful competitive advantage.

Shashua spoke at CES about cameras that will be capable of reading traffic signs and lights; understanding driving lanes, even when the road is unmarked; and continuously learning with over-the-air software updates.

MobileEye is currently a wholly owned subsidiary of Intel. The San Jose, Calif.-based chip giant acquired the Israeli company in 2017 for $15.3 billion. The buyout came a year after MobileEye and Tesla severed ties following a fatal accident, a low point for the computer vision pioneer, according to a report from Recode.

The good news for investors is Intel executives announced in December that half of its MobileEye shares will be spun out in an IPO to shareholders in 2022. Judging by the design wins and relationships with major automotive companies, the IPO is likely to blast off like a rocket ship.

A Reuters report last December noted that the IPO could value the company at $50 billion.

Intel shares have been under pressure after more than a decade of failed projects. The company lost the race to dominate mobile computing chips to Qualcomm (QCOM). More recently it has been ceding market share in personal computers to Advanced Micro Devices (AMD). And Apple (AAPL), a longtime chip customer, will transition in 2022 completely away from Intel chipsets.

MobileEye looks like it will be a much needed big win for Intel shareholders.

At a price of $55.91, Intel shares trade at only 15.1x forward earnings and 2.9x sales. The dividend is 2.5%. During 2021 gross margins were 56%.

Long-term investors should consider using the current weakness to add shares. The stock could easily trade back to the 2020 highs at $66 based on the MobileEye IPO excitement, and the revaluation of Intel shares.