Mobileye’s stock melts down as inventory issues prompt grim revenue warning

[hist78]

"Mobileye said it expects first-quarter revenue to fall about 50% from the $458 million that it reported in the year-earlier period. Analysts tracked by FactSet had expected revenue to rise to $557 million for the period"

Mobileye is not a startup that has no experience or visibility to manage such 50% revenue swing. Also, we haven't heard that the auto industry had or will have a 50% production drop. It's a very strange situation.

Mobileye’s stock melts down as inventory issues prompt grim revenue warning

The company disclosed that it has "become aware of excess inventory at our customers," representing an estimated 6 million to 7 million units of the...

www.marketwatch.com

 

[nghanayem]

Yeah very weird. Their core product is cameras for emergency brake systems. For them to have 50% too much inventory is very unusual since many manufacturers use their technology for practically every model.

My only plausible explanation would be that the auto makers were double and triple ordering their chips, but now that the automotive semiconductor channel is balanced out many makers cut orders to digest excess inventory.

 

[count]

Yeah very weird. Their core product is cameras for emergency brake systems. For them to have 50% too much inventory is very unusual since many manufacturers use their technology for practically every model.

My only plausible explanation would be that the auto makers were double and triple ordering their chips, but now that the automotive semiconductor channel is balanced out many makers cut orders to digest excess inventory.

Another explanation, a bit more of a cynical take, is that there was some revenue manipulation ahead of the recent IPO, and now that IPO is in the year view mirror the rug is being pulled.

 

[tooLongInEDA]

Yeah very weird. Their core product is cameras for emergency brake systems. For them to have 50% too much inventory is very unusual since many manufacturers use their technology for practically every model.

My only plausible explanation would be that the auto makers were double and triple ordering their chips, but now that the automotive semiconductor channel is balanced out many makers cut orders to digest excess inventory.

That seems highly implausible. Unless they were asleep at the wheel, it can't have been too difficult for them to correlate chip shipments into auto makers to auto maker production and sales (car inventory being rather difficult to hide). Equally curious that none of the Wall Street analysts would have picked this up. So MobileEye would far more likely have been aware of multiple ordering, but chosen not to disclose this information to investors.

 

[hist78]

Another explanation, a bit more of a cynical take, is that there was some revenue manipulation ahead of the recent IPO, and now that IPO is in the year view mirror the rug is being pulled.

A financial engineering habit learned from Intel?

 

[nghanayem]

That seems highly implausible. Unless they were asleep at the wheel, it can't have been too difficult for them to correlate chip shipments into auto makers to auto maker production and sales (car inventory being rather difficult to hide). Equally curious that none of the Wall Street analysts would have picked this up. So MobileEye would far more likely have been aware of multiple ordering, but chosen not to disclose this information to investors.

I'm pretty sure the multiple ordering is something all of the major automakers have admitted to doing. Automakers also canned their orders to get in the shortage situation in the first place on suspected demand drops that never materialized. Conversely automakers were still talking about chip shortages even when TSMC of all people are having a hard time keeping fabs full. It could be that mobileeye was banking on them putting security over the comparatively small cost of continued over buying, but given the rough economic condition and piling up chip reserves the auto makers once again reneged on the orders they planned to buy. Either way it would be a mistake from management at mobileye. IF that is the true root cause let's not pretend that other chip design houses or even manufactures have never overestimated end market demand. I still remember the mountains of unsold inventory on intel, AMD, and NVIDIA's books at the beginning of 2023. With the exception of NVIDIA who had their DC business surge at the ideal timing intel and AMD's corp revenues and profits fell off a cliff off of client revenues shrinks and negative profit margins in client as a result of their supply overshoots.

 

[tooLongInEDA]

A financial engineering habit learned from Intel?

It looks like the IPO was at least 15 months ago, so too far in the rear view mirror to be relevant ?

The other curious thing is that if there was multiple ordering and inventory correction at auto companies, hasn't this also shown up at other automotive chip suppliers (I haven't checked) ? In which case even the dumbest Wall Street analysts should have picked something up. Also, why no correction to quarterly guidance by MobileEye for such a collosal revenue and earnings miss ? Wouldn't that be normal here ? Wouldn't they have known about this weeks if not months in advance of the earnings release.# ?

 

[Tanj]

My only plausible explanation would be that the auto makers were double and triple ordering their chips, but now that the automotive semiconductor channel is balanced out many makers cut orders to digest excess inventory.

Their quarterly statement clearly explains the problem. Over the past couple of years their customers have had supply chain security policies that mandated buildups of months of inventory and recent discussions with clients have found an almost universal change in policy to wind down those inventories because concerns about supply chain have waned combined with higher interest rates on maintaining those inventories. So they expect the first half of next year to have lower sales as the customers will wind down their inventories to new lower levels which match their new policies.

 

[Tanj]

The other curious thing is that if there was multiple ordering and inventory correction at auto companies, hasn't this also shown up at other automotive chip suppliers (I haven't checked) ? In which case even the dumbest Wall Street analysts should have picked something up.

Yep, Wall Street is busy today figuring out who else will have the same problem.

Also, why no correction to quarterly guidance by MobileEye for such a collosal revenue and earnings miss ?

This was the quarterly guidance. The quarter just closing was fine, they issued guidance heavily down, with explanatory notes.

They do expect the second half of 24 to return to normal once customers reach their inventory goals. The drawdown is expected to be mostly occuring in the first quarter.

 

[Xebec]

This may not be too surprising.

Most cars using MobilEye are Electric Vehicles, especially from VW Group.

The EV market is really fluctuating right now - with some brands experiencing cratering demand world wide short-term as standards switch over (CCS to NACS), changes in incentives (US federal credits, EU rule changes), and strong competition in the worlds largest EV market (China). VW is doing particularly poorly to the point that the CEO said they are not competitive, have been laying off, and are moving a large division from Germany to China to grow their EV capability there to try to stem the tide on affordability.

I think what happened is the customers of MobileEye are all taking a bit of a pause both on production due to rising inventory, and also for cost reasons (less premium mixed vehicles), and that all landed in Q4/Q1 because of the inputs outlined above.

https://www.cnn.com/2023/11/27/business/volkswagen-brand-no-longer-competitive/index.html

China's transition to EVs is so fast that Volkswagen is on track for its worst local sales in years

Volkswagen is on track for its smallest year of China sales since 2012, according to CNBC analysis of public data for the first three quarters of the year.

www.cnbc.com

(Geely is another large customer of MobileEye, and they’ve been growing, but they’re still small market-share wise compared to BYD or Tesla in China, think 5-6% vs 25+% each).

 

[blueone]

Also, why no correction to quarterly guidance by MobileEye for such a colossal revenue and earnings miss ? Wouldn't that be normal here ? Wouldn't they have known about this weeks if not months in advance of the earnings release.# ?

Just to clarify, the statement Mobileye made was not an earnings release, it was a warning. Also, this looks like a classic case of a manufacturing company thinking higher customer inventories were the new normal, and it was apparently just a transitory policy, and it's almost certain not every customer acted in concert, so it probably took some number of months for the tidal wave of order cuts to build.

As for the conspiracy theories of "financial engineering", I've seen that question come up before in start-ups, but you don't see it in a US publicly listed company. (In fact, some US-listed Chinese and Hong Kong companies got in trouble with the US PCOAB over audit deficiencies last year.) Mobileye is an Israeli company, but since they're listed on NASDAQ they're subject to the very strict rules and potential penalties of the US Securities and Exchange Commission. And no major US audit firm is going to sign off on that sort of hanky-panky either. So I'm thinking the most likely scenario is this was just a case of wrongly thinking the new normal of high customer inventory levels, as opposed to just-in-time deliveries, would last a lot longer than it did.

 

[hist78]

Just to clarify, the statement Mobileye made was not an earnings release, it was a warning. Also, this looks like a classic case of a manufacturing company thinking higher customer inventories were the new normal, and it was apparently just a transitory policy, and it's almost certain not every customer acted in concert, so it probably took some number of months for the tidal wave of order cuts to build.

As for the conspiracy theories of "financial engineering", I've seen that question come up before in start-ups, but you don't see it in a US publicly listed company. (In fact, some US-listed Chinese and Hong Kong companies got in trouble with the US PCOAB over audit deficiencies last year.) Mobileye is an Israeli company, but since they're listed on NASDAQ they're subject to the very strict rules and potential penalties of the US Securities and Exchange Commission. And no major US audit firm is going to sign off on that sort of hanky-panky either. So I'm thinking the most likely scenario is this was just a case of wrongly thinking the new normal of high customer inventory levels, as opposed to just-in-time deliveries, would last a lot longer than it did.

"but you don't see it in a US publicly listed company. "

Unfortunately, it happened more frequently in US than people assume and often they were large publicly traded corporations. Even worst, they are all audited by those largest accounting firms in the world. Such as:

Enron
GE
WorldCom
Hertz Global Holdings Inc
Tyco Industry
AIG
Waste Management
HealthSouth Corporation
Freddie Mac
Lehman Brothers
The Kraft Heinz Company
Bristol-Myers Squibb Company

For Intel, its "Contra Revenue" practice is a financial engineering to me. It's legal but a smart CEO won't waste time and money on it.

 

[blueone]

"but you don't see it in a US publicly listed company. "

Unfortunately, it happened more frequently in US than people assume and often they were large publicly traded corporations. Even worst, they are all audited by those largest accounting firms in the world. Such as:

Enron
GE
WorldCom
Hertz Global Holdings Inc
Tyco Industry
AIG
Waste Management
HealthSouth Corporation
Freddie Mac
Lehman Brothers
The Kraft Heinz Company
Bristol-Myers Squibb Company

For Intel, its "Contra Revenue" practice is a financial engineering to me. It's legal but a smart CEO won't waste time and money on it.

First of all, I was specifically talking about adjusting revenue recognition to pump up quarterly or annual results. That is a specific illegal accounting practice that auditing can easily catch. You have a list of companies here that had issues which had nothing to do with the discussion in this thread. For example, AIG came close to bankruptcy because of its very questionable but unfortunately legal actions in the subprime mortgage crisis, resulting in AIG needing one of those "too big to fail" bailouts from the USG. Freddie Mac also got caught up in the subprime mortgage fiasco. This has nothing to do with what people in this thread are insinuating Mobileye might have done. And I've just picked up two randomly selected companies from your list I happen to know something about. Here, I'll do another one. Waste Management's practices regarding inflating the value of assets resulted in criminal charges against senior management and fines paid by their audit company for being complicit (the auditor was Arthur Andersen, which no longer exists because they also got caught up in the much more significant Enron scandal). So if your message is that sometimes US public companies break the law, yes, they do, but contrary to the insinuations here it's unlikely that Mobileye falls in this category. Well, at least there's been no evidence presented that they are guilty.

As for Intel, well, contra-revenue is not their worst practice. Intel is still getting hit for their anti-trust violations it committed in the 2000s, when they paid customers not to use competitors' CPUs. Nonetheless, accountants aren't anti-trust law experts, so if the books look in order, the auditors probably won't catch it. The amusing part of this is that Qualcomm also got fined for the same practice, and one of the companies who were supposedly injured by Qualcomm's payments to Apple was - wait for it - Intel, in cellular modems.

 

[Daniel Nenni]

Weird indeed. That will be an interesting investor call.

Or is the automotive bubble ready to burst? The local car lots used to be full of new cars and now they are relatively empty. We took our Toyota Sienna in for service and the lot was empty. Lower inventory = higher margins? I have never seen a lot full of Teslas but Northern CA is lousy with them.

 

[Tanj]

Tesla does not have dealers and they tend to store their inventory in low rent lots off the beaten track, sized to match the market.

 

[Daniel Nenni]

Tesla does not have dealers and they tend to store their inventory in low rent lots off the beaten track, sized to match the market.

My wife and I saw the movie "Leave The World Behind" where brand new Teslas were hacked and piling into each other. We laughed then my dear wife said wait, could that really happen? And we laughed even harder because it could.

 

[Tanj]

Pretty much every modern car can be hacked. At least Tesla runs regular challenges - win a Tesla if you can hack them. The last hacks reported were in 2022 (probably better firmware by now) and not at all like the movie.

Check out the problems Range Rover has at the moment. But they are not alone. Every car using CANbus is vulnerable to easily available equipment widely used. Tesla does not use CANbus, so if it can be hacked it requires something else.

It is easy to laugh but that does not mean it is real.

 

[Daniel Nenni]

I agree it is not only Tesla but it was funny because it was Tesla. Do you remember the Jeep hack? That was not real either? Just wait until Quantum computing hits the streets. I can assure you Tesla will be a prime target. Why? Because of Elon Musk.

 

[Tanj]

Because of Elon, Tesla will be the first with quantum resistant cryptography. Name any other CEO more likely to understand exactly what will be needed.

 

[Daniel Nenni]

Because of Elon, Tesla will be the first with quantum resistant cryptography. Name any other CEO more likely to understand exactly what will be needed.

My guess is that it will first come from a German automotive company and it will be implemented in silicon not resistant software patches.