by Travis Johnson, Stock Gumshoe | January 11, 2017 11:43 am
Lots of questions rolling in about this one — it’s a pitch for Sean Brodrick’s Oxford Resource Explorer, which these days is offered at $79 a year (or $49 for email-only)… though the letter is actually signed by David Fessler, one of their analysts who has generally been touted as an energy and resource expert in ads we’ve covered in the past.
Here’s how the ad starts:
“The Only Patented ‘Cure’ That Could Save 1.5 Million Lives Annually…
“IN THIS TINY SQUARE
“Surprisingly, the company behind this square technology has NOTHING to do with healthcare.
“Yet is is poised to lead from $340 million in revenue… to $19.2 BILLION… an astonishing 5,547% increase!”
That’s accompanied by a photo of what looks like a fairly large semiconductor chip being held in a gloved hand (2cm by 2cm is far, far larger than the chips in your phone or tablet, for example, we’re used to seeing tiny stuff pitched these days).
And the health bit gets pushed further still:
“It may appear unimpressive, but inside this tiny square lies a major technological breakthrough.
“It’s not a new microprocessor… or a new pacemaker… and it’s not a magnetic cancer-fighting device or anything like that.
“But thanks to this 2.5 by 2.5 centimeter square, you can have virtual immunity from one of the most preventable causes of death in the world.
“One that, according to the World Health Organization, kills 1.5 million people every year.”
We’ll skip ahead a bit and say that yes, what they’re talking about is auto accidents. Humans, on average, are terrible drivers… and despite the fact that cars have gotten much safer over the years with airbags and seat belts and anti lock brakes and safer roads and all kinds of other automotive safety features, auto accidents still kill a lot of people. The promise here is that reducing reliance on human attention, reaction time, and instant and precise decision making will improve driving — just like it has improved factory automation and so many other aspects of modern life.
More on this hinted-at company:
“And one company has a patent moat around this entire lifesaving technology.
“It has 18 U.S. patents and six European patents and has applied for 52 others worldwide.
“Analysts call it ‘An intellectual property powerhouse.’
“In short, it’s locked out ALL competition for the foreseeable future.
“In fact, the CEO of Baron Capital (which manages $26 billion in assets) flat-out says this company ‘has a monopoly.’
“Now, I should tell you… the company in control of this lifesaving technology is NOT a biotech or a healthcare company.
“But it’s about to change our world in ways never before imagined.”
What investor wouldn’t want that, right? A big trend, a patent moat, locking out all competition… what could go wrong?
Fessler then goes on to explain how much money is pouring into this industry… which, if you’re a thoughtful investor, should make you wary. The fact that Andreessen Horowitz, Google, Apple, and the U.S. Government are all investing billions into this industry does not reassure me that “one company and its tiny square” are at the forefront and poised to maintain a monopoly.
But let’s set that skepticism aside for just a moment and get a few more clues from the ad so we can ID the stock for you… that way, you can think for yourself and leave the marketing pitch behind before you even consider investing in the company. Here’s a bit more from Fessler:
“You see, there’s one company with a heavily patented solution to this massive problem.
“18 patents in the U.S, six in Europe and 52 pending worldwide.
“This technology can… and will… virtually ELIMINATE every single car, truck and bus accident.
“One company with the real potential to ‘reduce accidents to zero… [and] save close to 1.5 million fatalities,’ according to its CEO…
“To cut the cost of car accidents in America from $1.3 TRILLION to next to nothing…
“To end the sort of chronic back and neck injuries that keep people in long-term hospital care and out of the workforce.
“This company has the perfect technology – contained in that little square I showed you earlier…
“It’s actually a system on a chip that will finally make driverless technology a reality.”
This is what newsletter ad copywriters do better than anyone else: take a big trend, use huge numbers for economic impact… and then skip a few dozen steps and conclude that all of that economic impact (or a huge portion of it) will go to blowing up the revenue of one specific company that’s a part of that trend.
That never happens… or almost never. Apple captured most of the profits in the smartphone industry for several years, Intel captured a huge portion of desktop computer chip revenue (and Microsoft the operating system revenue) for a couple decades… but the reason we know those stories is because they’re a rarity: Huge markets with monopolies or near-monopolies. Most of the time, that’s not how real life works… and we very easily forget all the could-have-been companies whose technology or marketing wasn’t good enough (Blackberry, AMD and IBM in computer chips, Apple in operating systems from 1980 to 2005, etc, to say nothing of all the companies that failed early on, and failed to shift their business, and have been completely forgotten by the forward-thinking markets). All those companies had real potential, strong market positioning, and patents… and it didn’t really matter.
So that’s my last bit of big picture warning — just remember to apply a dollop of that skepticism whenever anyone gives you percentage increases that have a comma in them. There are several charts and bold type assertions that the driverless car market will go from $3 billion to $96 billion (from 2015-2025), and that this increase (which is 3,100%, if you’re keeping track) will lead to “an astronomical 5,547% jump in revenue for the single company at the forefront of a revolution.”
By way of comparison, Apple’s increase in revenue during the iPhone era, which has now been ten years, was almost exactly 1,000% at the peak last year (revenue fell a bit this year). That’s for what has arguably been the most successful consumer product in history, with unusually strong brand power and persistent margin strength (meaning, unlike most consumer and technological products, that they staved off competitors and kept pricing power better than anyone would have guessed a decade ago). So these kinds of gains are possible for strong brands who maintain strong market share and avoid margin erosion, and they can trickle down to the share price (AAPL stock’s total return over those ten years was about 950%). But “possible” doesn’t mean “frequent” or “likely” or even “predictable.”
So… what’s the company Fessler is pitching? Final clues:
“Its product will be in almost every single driverless vehicle…
“It’s contracted with 90% of every big-name auto company you know…
Jaguar Land Rover
And Honda (to name a handful).
“And every one of these major auto companies is currently developing driverless cars using this tiny patented chip.
“That’s why we expect its revenue to jump 5,547%….
“… by the start of 2017, 100 of the DTR Company-fitted Volvo XC90s will be available to consumers in Gothenburg, Sweden, ‘for use in everyday driving conditions,’ according to Fortune.”
And what is it that this tiny chip does? Clues:
“In simplest terms, it works like this…
“The software inside the square analyzes video in real time… and is able to detect anything in the car’s path.
“From pedestrians… to wildlife…
“To other cars on the road…
“The system then makes real-time adjustments to avoid a potential accident… at speeds much faster than any human reaction….
“The U.S. Department of Transportation was so impressed with the DTR Company’s technology that it decided to contribute eight-figure funds to a multiyear partnership.
“That’s because it’s ‘the future of transportation,’ Secretary Foxx said.”
That DoT “eight figure funds” partnership was not just with this “secret” company, that’s part of the “subject to future appropriations” $40 million fund that is going toward the “Smart City Challenge” … one piece of which will likely include smarter vehicles, of which one small piece will be the actual sensors used on those vehicles. The “Smart City” winner was Columbus, Ohio, by the way… and the company being teased here is one of the partners in that “Smart City” venture, Mobileye (MBLY).
Yes, good ol’ Mobileye, being teased again as the leader in driverless cars. And they do have a commanding market lead in some segments of this still-very-small market, thanks to the software they created that allows them to process visual signals from a single front-mounted camera and interpret those signals quickly to allow responses without other sensors or binocular vision. That single-camera solution was cheaper and simpler, so it got quick adoption by some luxury carmakers and has been a pretty successful aftermarket solution, though there are also lots of other sensor technologies out there (from multi-camera systems, to radar and lidar sensors, and probably including lots of stuff that I don’t understand at all).
And just to take one example, those “eight figure funds” from the Department of Transportation won’t be material to MBLY… that’s just an example. What Mobileye is contributing to the partnership are sensors for buses, which they call Mobileye Shield Plus, and those sensors are built into new buses and add about $5,000-6,000 in cost per bus. Columbus has about 300 buses, so if they replaced all of them right away that would be $1.5 million in potential revenue for Mobileye — though, of course, they’re not going to scrap a new bus and buy a new $300,000+ vehicle just for this safety and connection feature. Perhaps safety features will speed up the upgrading and recycling of the bus fleet in major cities, as we’ve seen that electric buses and more efficient buses have sped up new adoption from time to time, and buses don’t last that long (10-12 years is typical) so there is a constant upgrade cycle… but this isn’t going to drive Mobileye’s revenue into the stratosphere.
What investors are hoping for is that Mobileye’s technology will become standard on all vehicles and drive revenue higher — and it’s still fairly early. Worrisome things pop up all the time to counter the positives (like the large number of cars that are already equipped with Mobileye sensors, and the number of auto companies that Mobileye is working with)… negatives include the fact that Tesla has dropped Mobileye, and Alphabet’s newly separated Waymo has developed its own hardware and software and sensors (including cameras) that don’t require Mobileye’s technology (that worried MBLY investors this week when more details were announced by Waymo at the North American Auto Show, helping MBLY shares to take a little dip of 5% or so on Monday).
But even given those negatives, MBLY has gotten a little bit more reasonable in price of late, partly because the shares are down a bit from their highs of a year or two ago when they were newly public and “hot” and partly because the earnings growth expectations have firmed up. There isn’t a huge amount of earnings growth yet, but analysts expect earnings growth to be substantial this year and for the next several years — estimates range pretty widely, but generally the expectation is that MBLY will post earnings growth of 40-50% both for 2016 when it’s final and for 2017 and 2018, getting them $1.03 in earnings this coming year and $1.57 in 2018. So the forward-looking PE ratio, using those 2018 numbers, is 26 — not bad for a company that’s growing earnings at 40-50% a year.
The trailing PE ratio, of course, is more sobering at about 100. So, the rub is that this is all about growth and expected persistent growth… and that relies on both strong revenue growth and strong margins, which means they have to be able to hold off whatever competition there is from other sensor technologies in what seems to me to be a very fluid industry. I would hesitate to say they’re going to fail, because unlike most other technologies they are actually selling products that are built into cars and being used on the road, with a track record of increasing safety… but I would hesitate to assume that they’re going to dominate the driverless car industry.
Where does Fessler get his estimates about MBLY’s revenue growth? Here are the details he gives:
“The entire driverless market will explode into a $96 BILLION industry in the years ahead, according to Goldman Sachs.
“That means if the DTR Company at the forefront of this revolution were to capture just 20% of this growing market…
“It would lead to a 5,547% revenue boost from its current $340 million figure.”
There are a lot of assumptions built into that — the Goldman Sachs estimate he cites was that driverless cars are currently a $3 billion business (as of 2015) and will grow to $96 billion by 2025… and that’s obviously just a made-up forecast, since no one really knows, but you have to start somewhere.
If we use that same rationale to look at Mobileye, which was an early mover in sensors and had probably at least as strong a market share in 2015 as they do in 2016, then we have to use MBLY’s 2015 revenue, which was a $240 million. So by that measure, MBLY had 8% of the revenue in the driverless car market. If they keep that market share and Goldman Sachs is right, that would be $7 billion in revenue for them in 2025. Which is awfully close to where their revenue would be if it grows at 40% a year for the next nine years. So there’s perhaps a path to thinking about this as a feasible future, but you’re also talking about a $9 billion company that relies heavily on patents to protect it’s small slice of the camera sensing market, and the two most well-known companies in next-generation “autopilot” technology, Tesla and Alphabet/Google, have decided they don’t need Mobileye.
So there you have it — a company with a strong position in the early stages of a major trend… but some real questions about whether it will maintain that strong position over the coming years as autonomous cars gain traction and speed ahead. I haven’t been able to get confident enough in Mobileye’s future market share to be willing to pay what is still a premium growth-stock price for the shares personally, but it is certainly a company with a lot of partners, some honest potential, and a very strong analyst forecast of growth over the next couple years.
And with that, you can go forth, researchify, and make your own call — and please do come back and tell us what you think about MBLY’s prospects by adding a comment below, every bit of knowledge and input makes us just a wee bit wiser. Thanks for reading!
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