Intel’s Mobileye Is Set To Spin Off At An Incredible Discount

Summary

• It’s a terrible time for an IPO, but IntelINTC
  is still planning to offer one.
• Mobileye will hit the markets at around the same price Intel paid for it five years ago, despite a revenue CAGR of 36%.

With the bear market going strong, it is a terrible time for companies to go public, which is why initial public offerings are down nearly 80% at this point in 2022 compared to the same time a year ago. Nevertheless, Intel Corp. (INTC, Financial) is planning to go ahead with the spinoff of its self-driving subsidiary Mobileye, sending its stock down more than 3%.

Even though the Mobileye IPO will not raise much money in the current market compared to what it might have fetched in the quantitative easing bubble of late 2020 and early 2021, Intel is in desperate need of cash to fund the buildout of its capital-intensive semiconductor production business.

According to a Tuesday filing, Mobileye is targeting an IPO that would value it at $15.9 billion, or about $18 to $20 per share. Five years ago, Intel bought Mobileye for $15.3 billion, and since then, the self-driving business has increased its sales at a compound annual growth rate of 36%. In other words, Intel’s need for cash may prove to be a boon for investors as it is spinning off Mobileye at an incredible discount.

Intel is strapped for cash

Intel investors have been awaiting a spinoff of Mobileye for quite a while. When Mobileye first filed paperwork for its IPO this past March, it had already been in the works for at least a year.

Amidst a protracted global chip shortage, the U.S. government has provided domestic companies with financial incentives to build semiconductor production facilities on home soil. These production facilities, which not only produce chips for their own company but also for other companies, are called “fabs.” Over the past couple of decades, the U.S. has increasingly outsourced chip production to fabs in other countries in order to take advantage of cheaper labor and more efficient processes, but as we have seen in the Covid-19 crisis, relying on international trade for semiconductors is a huge liability.

Intel sees this situation as a prime opportunity to return to growth. Building off of the fab industry leadership that it once held many years ago, the company hopes it can once again regain semiconductor dominance.

However, semiconductor manufacturing is a capital-intensive industry, which was one of the reasons why Intel left it behind in the past. Government incentives are expected to help with costs, but the company will still need to invest its own money.

While the growth prospects for Mobileye are good, it is still reporting net losses on its bottom line, making it an easy pick for Intel to spin off now that it is in need of cash.

Intel will retain control of Mobileye by holding 750 million shares of Class B stock, which has 10 times the voting power of Class A stock. There will only be 46.26 million Class A shares, with the potential for more if the underwriters decide to exercise their options.

Mobileye’s outlook

Mobileye has been a successful business for Intel since its acquisition. The company makes chips that power driver assistance systems and cameras for self-driving vehicles, a market that is expected to grow around 13.38% per year from 2022 to 2030 according to estimates from Precedence Research.

Over the past five years, Mobileye has grown sales at a CAGR of 36%, and if it can keep up anything close to this pace, it has the potential to grow faster than the broader self-driving vehicle market.

The recent IPO filing shows Mobileye’s revenue has grown from $879 million in 2019 to $1.39 billion last year. Based on Intel’s second-quarter earnings report, the Mobileye segment had revenue of $854 million for the first half of 2022, along with an operating loss of $36 million and a net loss of $67 million for the same six-month period.

New public offerings already have a reputation of tanking soon after hitting the market due to the fading of market enthusiasm as well as options being exercised by underwriters and insiders. Combined with the bear market and Mobileye’s current lack of profitability, even though the self-driving and driver-assistance markets have strong growth projections, the stock is unlikely to do well in the near term.

On top of the headwinds for Mobileye’s IPO, investors are also becoming disenchanted with the idea of self-driving cars. Self-driving systems have proven to be much more difficult to refine than many people initially expected. Even though self-driving and driver-assist technologies have become useful for well-marked and well-paved city roads, things become much more complicated when it comes to roads that are badly marked, full of potholes, require complex decision-making (such as traffic circles and unique traffic lights), etc.

Takeaway

Overall, while lower-than-expected proceeds from the Mobileye IPO would mark bad news for Intel, it is arguably better than keeping a cash-burning company on its balance sheet when what it needs right now is cash. The bad timing of Mobileye’s return to public markets could also mean an incredible discount for investors who are interested in the stock.

There is a strong argument to be made that Mobileye deserves the low valuation in the current market environment, though. Speculation will always play a key role in growth stock valuations, regardless of whether we are in a bull or bear market. Mobileye could face additional short-term valuation headwinds from a post-IPO selloff, and in the long term, self-driving technology may prove difficult to scale beyond driver assist programs and limited-use autopilot.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.