Too Many Red Flags for Mobileye

Over the last few months, Mobileye (MBLY) has defied gravity and has continued moving higher despite its ridiculously high valuation. Recently, BMW, Intel (INTC), and Mobileye announced plans to begin mass production of autonomous cars by 2021.

Mobileye said the partnership will utilize its EyeQ5 systems and its Road Experience Management technology to provide precise localization.

Following the announcement, Mobileye saw its shares jump almost 10%. Mobileye is now up almost 100% from its 52-week lows.

Even at 52-week lows, Mobileye was overvalued. After the recent rally, I think the stock is a definite short as there is no way the company can justify its valuation even if the autonomous car hype does come to reality in the future.

After the rally, Mobileye is now trading at 132x trailing earnings! Moreover, the stock’s P/S ratio now stands at 36.45 and it has a forward P/E of 42. No matter, how you look at it, Mobileye is overvalued. And if you combine it with the company’s growth estimates, the valuation is just ridiculous.

For instance, Mobileye’s sales are expected to grow at a CAGR of approximately 42% for the next two years. Assuming that the company manages to grow at the estimated rate, it would still take the company over a decade to grow into its current valuation.

The autonomous car technology is still in its early stage of development and I think it will take a few more years, if not decades, for the technology to become mainstream. There is no way that Mobileye can continue commanding such a ridiculously high valuation till the time autonomous cars become an everyday object.

Insiders have been making the most of the stock’s overvaluation by cashing out their positions, and this should be a big red flag for investors. Even Goldman Sachs, the bank that underwrote Mobileye’s secondary offering, recently downgraded Mobileye.

Conclusion

Be it the overvaluation, insider selling or the downgrades, there are enough red flags for investors to be cautious about Mobileye going forward. Mobileye is trading at an irrational valuation that will not hold up much longer. Although the company’s growth estimates are impressive, there’s no way Mobileye can grow into its current valuation for the foreseeable future.

Mobileye’s recent rally may have been a short squeeze, but rest assured the stock should move lower in the coming weeks. I would not be surprised to see the stock trade at under $20 in the coming months and would recommend investors to make the most of it by shorting it or buying put options.

Published on Jul 8, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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