Why Intel is Betting on Driverless Technology

The world’s largest and highest valued semiconductor chip maker Intel Corp (NASDAQ:INTC) is about to buy Israeli driverless car technology company Mobileye NV (NYSE:MBLY). Collision detection mapping, and integrated cameras, this merger has got it all. The entire deal is worth $15.3 billion. The $63 per share cash deal for Mobileye marks the largest purchase of a company solely focused on the self driving cars. It puts Intel in a dominant position in the fast moving autonomous driving sector. The deal can also significantly alter the competitive landscape among key technology system suppliers. Intel is renowned for hardware chips but Mobilieye is known for its collision detection mapping. The driverless technology company provides integrated cameras, and software for driverless assist systems, which are the building blocks for self driving cars. It was an early supplier of Vision Systems for Tesla Inc (NASDAQ:TSLA). But after a driver of a Tesla Model S car was killed using its auto pilot system the two companies went through a public breakup last year. The new merger between Intel and Mobileye will strengthens Intels’ position against rival chip makers such as Nvidia and Qualcomm. Mobileye shares jumped 30% to on the news. Intel shares were down 2%.

A lot of analysts seem to like the deal. Hans Mosesmann from Rosenblatt Securities states that “Intel is seeking relevance in automotive with the Mobileye acquisition in a market that is moving at a faster-than-expected pace. The acquisition is in line with the Altera acquisition in that it is defensive in nature and meant to defend Intel’s historical CPU (central processing unit) incumbency from various accelerator technologies.”

Cowen analyst Timothy Arcuri is also bullish on the deal and describes the acquisition as defensive in nature for Intel. “While this deal makes strategic sense, the action is consistent with a defensive posture in which Intel continues to throw huge amounts of capital (Altera, Mobileye, 3DXP memory) at defending its moat and selling more Xeons,” he said in a report. Arcuri rates Intel stock as market perform with a price target of $39/share, which is roughly 12% higher than today’s price.

But perhaps this is not the best move for Intel to make. At $15.3 billion, Intel will essentially be paying 43 times last year’s sales for Mobileye and 142 times its income from 2016. Some analysts are concerned that Intel is paying too much for the driverless car technology company.

Here are some Mobileye fiscal year 2016 highlights from a PR NewsWire news release.
• Total revenue of $358.2 million, up 48.7% year-over-year.
• GAAP Net Income of $108.4 million; Non-GAAP Net Income of $173. 3 million
• GAAP fully diluted EPS of $0.46; Non-GAAP fully diluted EPS of $0.73.
• Generated GAAP net cash from operating activities of $161.6 million; Non-GAAP free cash flow of $150.5 million.

The general analyst consensus on Mobileye NV is a hold with 17 out of 22 giving it a hold rating. There is one analyst each for a strong buy and a sell position. As for Intel Corp, the consensus is still a buy. Mobileye N.V. is engaged in the development of computer vision and machine learning, data analysis, localization and mapping for advanced driver assistance systems (ADAS) and autonomous driving technologies. The Company operates through two segments: Original Equipment Manufacturing (OEM) and aftermarket (AM). The Company’s OEM segment supplies the software algorithms and EyeQ chip that are the technology of the ADAS to the Tier 1 companies, which are the system integrators for the automotive industry. Meanwhile Intel Corporation is engaged in designing and manufacturing products and technologies, such as the cloud. In the race to develop self driving cars there has been an expansion of alliances among auto makers, chip supplies, and other technology firms.

This author currently owns 150 shares of INTC, and no shares of MBLY. And does not plan to buy any MBLY for 72 hours as of writing this post.