I like reading prospectuses.
They contain all kinds of useful information about companies, their risks and potential, upside and downside. The securities regulator's accountants and lawyers carefully review these documents, ensuring that they are accurate reflections of reality. Of course, no one has perfect vision on the future, however when the prospectus is deemed "effective" by the regulator it represents management's best estimate – and the regulator's best insights – on everything. Generally you will find wording similar to "you should rely only on the information contained in this prospectus as filed with the Securities and Exchange Commission" near the very beginning.
I was very excited when I read the IPO prospectus of Mobileye. It is packed full with industry and company-specific information. Mobileye, founded in 1999 and based in Israel, designs software embedded on a semiconductor chip that, combined with a camera mounted at the front of the car "perform detailed interpretations of the visual field … to anticipate possible collisions with other vehicles, pedestrians, cyclists, animals, debris and other obstacles." The proprietary algorithms also allow Mobileye to detect "lanes, road boundaries, barriers and similar items, and to identify and read traffic signs and traffic lights."
Except for my family, most people are already aware of the benefits of backup cameras and parking sensor technology. But the reason I am excited about Mobileye is that I believe the growth curve is about to accelerate. In my opinion, the widespread adoption of semi-autonomous driving systems is just around the corner.
History provides a lesson – the introduction of airbags and anti-lock brakes in 1994 by TRW Automotive, for GM. In the year, TRW's revenue and net income were roughly $8-billion (U.S.) and $200-million, respectively. Over the next two decades, the company grew its revenue and net income providing these safety features and was so profitable in doing so that it was sold twice in two decades.
Mobileye started shipping chips in 2007 and it took five years to deliver one million. In 2014, the company shipped 2.7 million chips. Mobileye technology is now embedded in 160 car models, from 18 original equipment manufacturers (OEMs). As of next year, Mobileye technology will be available on 247 car models, from 22 OEMs. The early adopters were more expensive car models with lower production volumes. As OEMs roll out this technology to lower-end models, units of total production will no doubt increase, since lower priced models enjoy greater sales volume.
It's instructive that airbags, combined with passive restraint systems, became mandatory in U.S. cars following a landmark 1984 ruling by the Federal Motor Vehicle Safety Standard, a decade before TRW Automotive started shipping to GM. Similarly, in January, 2015, the U.S. National Highway Traffic Safety Administration, which administers the New Car Assessment Program, included crash-imminent braking (CIB) – performed by Mobileye technology – to the list of features required to achieve a five-star safety rating.
Those are compelling positives. But as with everything, there are risks.
One, the current valuation – greater than 100 times 2014 earnings – is astronomically high. Two, Mobileye chips are produced at a single factory in France, owned by STMicroelectronics. Management is aware of this, and plans to stock more inventory going forward, but there is supplier risk.
Third, there is competition, though none has been as road-tested as Mobileye's technology. Again, the prospectus boasts that Mobileye technology has a 99.99-per-cent accuracy, based on "millions of miles of road experience data covering more than 40 countries at all times of day and in multiple scenarios – highway, country, city – across hundreds of vehicle models." I call this a knockout punch.
Fourth, although Mobileye is incorporated in the Netherlands, it is effectively run from Israel, a country surrounded by hostile neighbours. Fifth, there are legal liability questions. If a car gets into an accident, who is legally responsible – the driver or the technology? As an equipment supplier to passenger cars, the company can and will be sued.
However, weighing all of the positives and negatives, I hold an equity investment in Mobileye for my clients.
Gabriel Lowenberg is CEO and president of Lowenberg Investment Counsel Inc. (LICi), an independent wealth-investment management firm based in Ottawa, which owns Mobileye for the benefit of its clients. The views and opinion expressed in this article are those of Mr. Lowenberg and do not constitute investment advice.