Mobileye plunge on Tesla deal loss may be overdone

Published Tue, Jul 26 20163:39 PM EDT

Breakingviews

By Antony Currie

Tesla's velocity just caused a supplier spinout. Mobileye shares plummeted by nearly a fifth at one point on Tuesday after it said it would stop providing advanced cameras to Elon Musk's electric-car maker in 2018. It's a huge overreaction because of all the Tesla hype. Sales to Tesla, after all, account for only about $2 million – or half a percentage point – of Mobileye's expected annual revenue this year, according to Evercore ISI. Even at the ridiculously high 82 times 2016's expected earnings at which Mobileye trades, that's only worth $62 million, applying the company's probable 38 percent net margin. More from Breakingviews : Bankers will miss their Yahoo search queries Investors, it would seem, were on autopilot. They immediately wiped out some $1.8 billion of Mobileye market value. Even after a morning recovery, by lunchtime there was still nearly $700 million gone. If Mobileye sales to Tesla were to hit the upper end of Evercore ISI's estimate of $60 million by the end of the decade, it'd cost the company 5 percent of 2019 revenue. That would still only be worth some $550 million, based on a 50 percent net margin and a multiple of 18 times that year's possible earnings. Part of the problem is Tesla itself. As good as its cars may be, its acolytes have driven the stock to an overheated 26 times expected 2019 net income on the assumption it will be the long-term leader in electric and autonomous vehicles. Any news about the company can rub off on others down the supply chain and in the periphery. Mobileye does provide a lot of the technology for Autopilot, Tesla's assisted and autonomous driving system that is being investigated after a fatal crash in May. Musk made clear, however, that his company had adapted the technology, saying to "direct all criticism (about Autopilot's potential failure in the crash) at Tesla." The accident makes clear that the shift toward autonomous cars will not be a smooth one. That should be obvious for any new technology, and even more so for one in an industry whose history of improvements often involves tragic deaths. The Mobileye episode is a reminder for shareholders to buckle up. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com

People test drive the new all-wheel-drive version of the Tesla Model S car in Hawthorne, California October 9, 2014.

Lucy Nicholson | Reuters

Sales to Tesla, after all, account for only about $2 million – or half a percentage point – of Mobileye's expected annual revenue this year, according to Evercore ISI. Even at the ridiculously high 82 times 2016's expected earnings at which Mobileye trades, that's only worth $62 million, applying the company's probable 38 percent net margin.