By Tigran Minasian, Ross Barrett, Kai Ye and Oscar Silva (Imperial College London), Adil Amlaiky (McGill University)
Photo: Samuele Errico Piccarini (Unsplash)
Summary of IPO
After Intel acquired 100% of Mobileye for $14.9bn in 2017, it is now making a minor spin-off of Mobileye’s shares for recapitalisation. The IPO of Mobileye on the Nasdaq Global Select Market is the first large IPO in the technology industry since the market slide in January 2022. Therefore, investors are closely watching this deal as a precedent for further listings.
The market liquidity squeeze since January, and its subsequent de-valuation of technology companies caused the projected market cap for Mobileye at IPO to be reduced from $50bn initially to $30bn, then $17bn when the deal was finally settled in September 2022.
Despite much reduced capitalisation, the IPO comes at a critical time for Intel, as it faces significant financial demands from increased investments in chip manufacturing to compete with Taiwan’s TSMC - the biggest manufacturer of processor chips. However, the maximum proceeds from the sale, $820mn, is dwarfed by the tens of billions of dollars of chip production investment outlined in Intel's previous announcements, with Intel committing $36bn to chip manufacturing in Europe alone. Therefore, many analysts believe that the immediate return from the sale will do little to relieve Intel's financial pressure.
Mobileye has said it will direct capital raised from the IPO to pay down some of its obligations and use the rest for working capital.
Company and IPO Profile
Sector: Auto Parts and Equipment/Automotive Industry Software
Ticker: NasdaqGS:MBLY
Listed Exchange: NasdaqGS
Amount raised: $861mn
Offered price and number of shares: $21/share with 41mn shares
Equity offered: 5.15%
Seller/Exiter: Intel
Co-lead Underwriters: Morgan Stanley, Goldman Sachs, BofA Securities, Barclays Capital, Citigroup Global Market, Mizuho Securities, Nomura Securities, BNP Paribas Securities, Evercore Group, WR Securities and RBC Capital Markets
Mobileye Global Inc. develops and deploys advanced driver assistance systems (ADAS) and autonomous driving technologies and solutions worldwide. The company offers Driver Assist, which comprises ADAS and autonomous vehicle solutions that cover on-road safety features; Cloud-Enhanced Driver Assist, a solution for drivers with enhanced interpretations of a scene in real-time; Mobileye SuperVision, an operational point-to-point assisted driving navigation solution on various road types. It also provides Mobileye Chauffeur and Mobileye Drive - Level 4 autonomous solutions which comprise Self-Driving System & Vehicles and Autonomous Mobility as a Service.
Founded in 1999, headquartered in Jerusalem, Israel
CEO: Amnon Shashua
Number of employees: ~2,500
Deal Implied Market Capitalization: $16.7bn
Market Capitalization as of 08th Dec: $25.3bn
Deal Size / EBITDA: 4.8x
Deal Size / Revenue : 16.7x
Deal Size / Cash Flow: 7.7x
Deal Size / Net Income: n.m.
Strategic Rationale
The proceeds from the sale will fund significant investment in chip manufacturing required to remain competitive against TSMC. It will also permit further investment in new extreme ultraviolet (EUV) lithography systems. This technology is used to etch circuit patterns on silicon wafers for the smallest and densest chips in the world. Currently, a single EUV system costs ~$200 million to manufacture and requires multiple planes to ship - a figure which is expected to decrease with further R&D of the technology. TSMC currently leads in market share, because of having invested in a large number of EUV systems since the inception of the technology, producing 90% of the world’s most advanced chips, whilst Intel currently leads in revenue.
Mobileye also published their Responsibility-Sensitive Safety (RSS) initiative, a mathematical model for ensuring that autonomous vehicles operate in as safe a manner as possible. This ESG Framework aims to reduce traffic accident related deaths. Every year, there are over 1.35 million deaths due to road traffic accidents worldwide, 93% of which occur in low- and middle-income countries. Mobileye aims to make the ADAS technology widely available and affordable worldwide, which should boost long-term revenue once the technology is commercialised.
Market Reaction
Build Up
Given the difficult year for IPOs, investors criticised Intel in their decision to take Mobileye public in 2022. Investors’ attention is directed towards the market sell-off. However, Pat Gelsinger, CEO of Intel, upheld the belief that it was in Intel’s best interest to move forward with the deal because it is part of a long-term plan to move Mobileye into the market. He emphasised that it was not a capital raise, rather he mentioned the autonomous vehicle segments’ strong expected growth. Although market conditions are suboptimal, he mentioned that an IPO is the “best way to maximise the company’s potential.” Moreover, Mobileye has healthier financials in terms of revenues and profitability than several other rivals that listed during the peak of the IPO boom. Mobileye’s autonomous driving segment is new, offering opportunity for growth. In FY21, its driver assistance technologies brought forth $1.4bn in revenue, and losses contracted from $19mn to $75mn.
Bankers on the deal were careful in their approach, floating only 5% of shares in the IPO. A significant portion was already assigned to two large investors before the roadshow began.
Launch
Though Intel’s Mobileye targeted a valuation of nearly $17 billion, less than a third of what had been expected previously, investors still lapped up what could be the last big IPO of 2022, with shares of the self-driving company rising by as much as 40% on the day of the IPO, valuing the company at $22 billion, before falling back slightly. The strong reception is testament to Mobileye’s strong financials, with current economic challenges causing investors to place greater focus on free cash flows, revenues, and profitability over growth projections. Shares opened above the IPO price of $21 at $26.71 each, with shares currently priced at $33.84 as of 22/12/2022. With the future of the stock highly dependent on the eventual implementation of autonomous driving technology within road vehicles, it will be necessary for the enthusiastic companies and investors behind Mobileye to convince the average consumer of the potential, and worth, of an autonomous, self-driving future.
Potential Risks and Downsides
The deal comes at a time of heightened scrutiny surrounding growth-stage companies, especially in the technology sector. Investors are currently working out how to navigate the tightening interest rate environment, with the Federal Reserve pivot indicating that rates will be higher for longer than investors may have expected, hurting businesses. This has led to a reality check by investors, inducing an investment shift away from growth firms into profitable ones, which will be able to pay down short-term obligations without a large need for additional investment and provide a healthy profit margin.
As previously mentioned, since this is the first large-cap tech IPO since the beginning of the current market downturn, investors will be watching its development very closely as a gauge of sentiment towards such companies. Unless Mobileye can begin to turn a strong profit margin soon, and bring down the cost of technology production, it may find itself facing greater scrutiny and see its post-IPO market capitalisation even more diminished than the several corrections that preceded it. Its projections will also be strongly affected by government regulation on autonomous vehicles, and as such depends on favourable policy to ensure good commercialisation of its products.
Furthermore, lenders are in general no longer providing financing unless a company can offer close to 100% loan-to-value collateral. However, it does appear that software companies have been the hardest hit by this correction, and as such Mobileye can be expected to be somewhat insulated against these risks.
“Intel’s acquisition of Mobileye has been a great success. Amnon and I determined that an IPO provides the best opportunity to build on Mobileye’s track record for innovation and unlock value for shareholders.” - Pat Gelsinger, CEO (Intel)