Mobileye: Tesla’s Worst Nightmare

TLDR; Mobileye is building a self-driving platform that is better and cheaper than Tesla FSD while providing automakers with the ability to customize the driving experience. Mobileye has collected 10X the data and 30X the miles compared to Tesla.

The year is 2030…

You are planning your annual spring break trip. Normally, you’d fight long lines at the airport or divide the driving among the adults in shifts as you scurry to the beach before exhaustion overwhelms the whole family. Not this year. You are going to try something new. This trip will be filled with leisure and rest. You’ll catch up on sleep, read a book, and maybe binge your favorite Netflix series. You’ll only be interrupted to refuel/recharge the vehicle or to stop for food/bathroom breaks. You aren’t driving the car, it’s driving you.

Recently, Aurora purchased shares of a company called Mobileye for clients in our Core Equity & Concentrated Equity portfolios. They are among a group of companies working to make this self-driving dream a reality. And it may happen sooner than you think. You probably associate self-driving technology with Tesla and their FSD technology employed in their cars. But chances are high you’ve used Mobileye before without realizing it.

What is Mobileye?

Mobileye is a major provider of ADAS (Advanced driver-assistance Systems) and supplies over 50 automakers (called OEMs which is short for original equipment manufacturers) worldwide. My Subaru Outback has their forward-facing camera solution which allows for automatic braking, adaptive cruise control, lane assistance, etc. Mobileye sells over 30 million of these per year (for context about 90 million vehicles are sold annually). This equates to about 65-70% market share for vehicles equipped with ADAS. You probably haven’t heard of them because they sell to automakers rather than consumers directly, but you have likely have been in a car with Mobileye technology. They make about $50 in revenue for each of these ADAS systems. Not much. However, as customers transition to higher levels of autonomy the price tag goes up. By a lot.

The Self-driving Future

The next step on the path to autonomy is what Mobileye calls SuperVision or “Hands-Off/Eyes On”. The most similar product on the market in the US today is Tesla’s FSD. This is already available in China and Mobileye books $1,500 per car using this technology from the OEM. Chauffeur or “Eyes-Off” is the next step and will likely be available on highways only at first carrying a $3,000 price tag to the OEM. Assuming they can master arterial roads as well in the future, they would command a larger price than that. It should go without saying that converting a customer from a $50 product to one that costs $1,500 or $3,000 has the potential to be transformational to the profitability and value of an enterprise.

While this may seem futuristic or a risky proposition, Mobileye has already booked deals to introduce these products in both the EU and US market. VW has signed on to include supervision or chauffeur as standard on 17 models starting in 2026 while Porsche will include supervision as standard on an undisclosed number of models starting in the same year. How fast these products spread to other OEMs & models depends on a number of factors including consumer demand, regulatory action, and shifting competitive dynamics.

Source: Mobileye, Note: “Western OEM” has been revealed as VW.

What about Tesla? Won’t They Dominate?

Most people associate self-driving technology with Tesla and assume they will dominate this burgeoning field. Tesla is perhaps the most visible competitor in the US along with Waymo and Cruise. However, according to Business Insider (link below chart) citing a study by the research and consulting firm Guidehouse Insights (April 2023), Tesla is actually a laggard when it comes to the technology. Despite all the hoopla, Tesla’s full self-driving is not actually full self-driving. It requires the driver to remain engaged for possible disengagements.

To Tesla’s credit, in Mobileye’s 4th quarter 2022 earnings call they that FSD is the only thing remotely close to Supervision. Tesla actually used to buy from Mobileye before they took the technology in house which is consistent Tesla’s vertical integration approach. FSD will remain entrenched inside Tesla and they have hinted at licensing the technology to other automakers. But why would Ford or GM want to license Tesla’s FSD if there were viable alternatives given the competitive nature of the business? They won’t.

The Expanding Moat of Mobileye

To be fair, Mobileye’s moat around self-driving is still under construction. But it’s coming together beautifully.

Network Effect (Data and Maps)

As of a March 2023 investor day, Tesla claimed to have 39 petabytes of data from 300 million miles of driving. Sound impressive? As of 2nd quarter 2023 earnings call, Mobileye had collected 400 petabytes of data on 9 BILLION miles of driving. How can this be? Remember, Mobileye has a dominant position in ADAS globally which requires forward facing cameras. They are using this to build their algorithms and develop real-time maps. When you have better maps, the car has to process less information to make decisions. The more people contribute to your platform the better the technology gets, making it more attractive to new customers. It also spreads costs over a larger base.

Switching Costs

Mobileye is building the business as a platform. It features universal standards for perception and the general actions an automobile will take. However, it allows OEMs to customize how the vehicles react and, in effect, control the driving experience. Logically, once an automaker has this in place, changing providers becomes a very costly and risky endeavor. The OEM can make it their own while adding a fee to their end consumers.

Most OEMs are testing technologies by 3rd party vendors such as Mobileye while they develop their own solutions. However, OEMs have historically struggled with software and, like Tesla, can only spread the development costs amongst the vehicles they sell.

Self-driving is a money pit for OEMs. Mobileye’s pitch is to provide a better and customizable product with improved economics than they can achieve on their own. If the competitive threat from Tesla and the Chinese OEMs (many of which use Mobileye) continues to intensify, it will force OEMs to accelerate their product roadmap and play right into the hands of Mobileye. Once the relationship is established, it will be difficult to end.

Perception Capabilities

Mobileye is at the forefront of vehicle perception of its surroundings. It has an award winning computer scientist as CEO in Amnon Shashua. They are about 88% owned by Intel (they were spun off from the tech giant in 2022) which affords them low-cost production of their system on a chip called EyeQ that is purpose built for computer vision. Custom hardware (along with maps) allow Mobileye empowered vehicles to outperform systems that cost significantly more. Essentially, they need less processing power to do the same job. Mobileye is also developing their own radar and LiDAR sensors to bring down costs. Part of the performance advantage is that Mobileye is separately developing self-driving based on cameras alone as well as a system based on LiDARs and radars. They call this “True Redundancy”. In an effort to control costs, Tesla relies solely on cameras which can be problematic when visibility is poor. By contrast, the driverless Waymo vehicles are estimated to cost north of $200,000 putting it out of reach for most consumers (if they were to sell them).

What's Mobileye Worth?

The range of outcomes is wide. Even though they have contracts in place, it is unclear how quickly demand will develop. We also don’t know what product development or regulatory hurdles might emerge. My base case scenario forecasts flat volumes for Mobileye while 25% of units convert to supervision and a further 25% to chauffer by 2033 with price declines of 2% annually. I also assume they never transition chauffer onto arterial roads. In this scenario, I estimate the company is worth $72/share as revenues explode from about $2B today to north of $33B in 2033. For a different view, if their product mix transitions as I expect but units sold fall to 23M by 2033 (possibly due to numerous viable alternatives), it would be worth just $17.

A Pre-mortem. Why Might this Investment Fail?

This could happen for a number of reasons:

Industry dynamics – Fast changing businesses can be difficult to predict. Mobileye has been the market leader for more than a decade, but that can change. OEMs could provide surprisingly adept at creating their own technology. Mobileye could make a mistake in their product roadmap or competitors may catch up or even surpass Mobileye.
Geography – Mobileye is based in Israel. Part of its workforce is currently serving in the Israeli Defense Forces. Should geopolitical tensions erupt further in the Middle East, it could be disruptive to business.

Valuation – It is possible that Mobileye cannot achieve the pricing, margins, and/or volume that I have forecast leading my estimate of intrinsic value to be inaccurate.

In Summary

While Mobileye is a business that is tricky to forecast, I think they hold an enviable position in a field where they can achieve significantly higher revenue and margins than the legacy ADAS business. Based on my analysis and forecasts, I have concluded that the stock presents an opportunity within a broadly diversified portfolio. If you invest on your own, do your own research to form your own independent conclusion.

Holdings Disclaimer: At the time of this writing, our clients hold shares of (MBLY) Mobileye in our Core Equity & Concentrated Equity Portfolios. This is not an offer or recommendation to buy or sell securities. We undertake no obligation to provide an update if/when our investment position changes.

Final Thoughts

At Aurora, we are constantly looking for attractive investment opportunities for our clients. We look for businesses with economic moats, quality balance sheets and attractive upside potential. This blog represents our thinking at the time of publication. If you are a DIY investor, use this only as a starting point for your research and be sure to do your own due diligence. For questions regarding our asset allocation and individual stock strategies, please reach out to us!

Invest Curiously,

Austin Crites, CFA

Austin Crites is the Chief Investment Officer of Aurora Asset Management, an Indianapolis-based subsidiary of Aurora Financial Strategies which is located in Kokomo, IN. He can be reached via email at austin@auroramgt.com. Investment Advisory Services are offered through BCGM Wealth Management, LLC, a SEC registered investment adviser. This blog does not constitute advice. This is not an offer to buy or sell securities. Advisor is not licensed in all states. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. BCGM Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Clients may own positions in the securities discussed.