Morgan Stanley's Jonas Weighs in on Mobileye (MBLY)/Tesla (TSLA) Divorce

Morgan Stanley analyst Adam Jonas offered his thoughts on news earlier in the week that Mobileye N.V (NYSE: MBLY) and Tesla (NASDAQ: TSLA) will not extend their relationship beyond the current generation EyeQ3 chip. Jonas said while it may never be clear who filed for the divorce, it is an important precedent for both companies and possibly for the broader industry.

1) The parting of ways is not a major surprise given our view of Tesla’s ambitions and capabilities. For quite some time, Tesla has been building a team of talented developers to bolster its in-house capabilities in autonomous driving including the hiring of well-known chip designer Jim Keller from AMD this past January. Many aspects of Tesla’s recent strategic update involve products and business models (e.g., mobility as a service) that depend heavily on autonomous driving features. Given the pace of technological development and heightened interest in transportation at some of the world’s most advanced and well capitalized tech firms, we believe Tesla views having a mastery of its own proprietary autonomous driving suite (including vision) as critical to its long term success and sustainability – not just a ‘feature’ to make a regulatory standard. We believe this split may have been under consideration for many months and we do not believe the recent autopilot fatality contributed materially to this decision. We also do not believe the split was due to any material deficiency in the capabilities of the MBLY system but was more likely related to differences in strategic direction and pace of development in the areas of automated driving and possible questions over the sharing of proprietary data.

2) Are fully autonomous cars overhyped? The market may be getting too far ahead of itself with the timing of fully autonomous penetration. While we are believers in the advancement of shared, electric and autonomous transport networks, we believe the global car park may need to be replaced several times over before the ‘average' mile traveled is executed by machines without steering wheels. Lately, we find ourselves engaged with investors who believe fully robotic 'taxis' may be the dominant mode of vehicular transport by 2030/2035. In our opinion, this is unlikely. There is still significant room to update the current car park during the initial stages of advanced ADAS technology adoption (in cars which still have steering wheels and actual human drivers).

3) There is more than one way to bring vision-based autonomous driving systems to market – just look at Toyota. Toyota (covered by Ryosuke Hoshino), the world’s largest and most valuable auto company (and one with a strong commitment to safety) does not use Mobileye technology. Based on our discussions with MBLY management, we do not anticipate this will change any time soon. MBLY management have not clearly answered for us why Toyota uses competing technology for their vision-based ADAS. We do believe that, for many auto companies, the ‘gift of sight’ is strategically important to the development of a semi-autonomous or fully autonomous car. We believe Toyota chooses not to use technology of the dominant market leader (MBLY) for their vision system so that they can learn for themselves the nuances of developing the technology. The strategic importance of this technology may extend beyond human assist/replacement in the driving action but can include real-time data capturing, processing, navigation and delivery of content. There are more than 600bn hours of collective human time spend in automobiles annually (>68 million years) which could be worth many trillions of dollars in terms of content and data monetization. Toyota, Tesla and others may want to have an opportunity to thoroughly independently analyze this opportunity from all angles before relying on outside suppliers for the enabling technology.

4) We would encourage investors to allow for a significant deterioration of market share and a compression of margins over time in their MBLY models. In our earnings forecasts we estimate MBLY’s market share in vision based ADAS declines from roughly 80% today to 50% by 2029. Additionally, we forecast MBLY gross margins falling from over 75% today to 55% by 2029. Despite this, the stock may still be attractively valued. In our view, both the size and ramp of the ADAS pie, along with MBLY’s current share and cash flow conversion, are sufficient to support the stock at or even above current levels.

The firm maintained an Overweight rating and price target of $48 on MBLY.

For an analyst ratings summary and ratings history on Mobileye N.V click here. For more ratings news on Mobileye N.V click here.

Shares of Mobileye N.V closed at $47.63 yesterday.

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