Quick Thoughts: Intel Doubles Down on Autonomous Cars

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  • INTC’s deal for MBLY is expensive, but vaults it to relevance in the emerging market for self-driving systems. Threats to the core x86 franchise make finding new markets an imperative.
  • MBLY, which has 70% share of the AI driver assist market, could pull along INTC processor and modem business with automakers, widening access to a $70B annual market opportunity.
  • Previous deals for machine vision chip designer Movidius and deep learning processor innovator Nervana underscore INTC’s aggressive pursuit of future growth
  • INTC/MBLY will compete with QCOM/NXP and NVDA for chip leadership for the next era. We expect further deal making as the 3 build position in automotive, hyperscale data center, and 5G connectivity opportunities.

Intel announced yesterday that it will acquire driver assistance technology company Mobileye for $63.54 per share in cash or $14.7B, a hefty 29x forward sales multiple for a company that grew revenue 48% last year and caters to 70% of the world’s automotive OEMs. INTC and MBLY have already been collaborating on autonomous vehicles with BMW since July 2016 and the deal is the latest in a string of announcements that has positioned INTC for opportunities in both automotive semiconductors and, more broadly, AI-related systems. The MBLY deal is INTC’s second largest acquisition ever, after Altera nearly two years ago, and complements previous deals for deep learning software maker Nervana and computer vision semi maker Movidius. INTC’s moves to beef up its offerings to automakers and hyperscale data center operators sets up a three-horse race emerging with NVDA and QCOM.
The pressure is on for Intel to diversify its revenue streams outside x86 computing, which currently make up 84% of revenue. INTC obviously missed the boat on mobile – smartphone makers never seriously considered a shift away from the ARM standard and INTC lost well over $10B cumulatively in its mobile efforts. To its credit, the company has successfully defended against the decline of PC sales with chip sales to data center operators, but will likely face future pressure ARM alternatives. We have written about hyperscale datacenter architecture at length. (http://www.ssrllc.com/publication/37440/)
Recent Gartner and IDC estimates show roughly 40% of overall server CPU sales to customers other than the traditional enterprise server makers. We believe that the large majority of that figure is demand from hperscale cloud players like GOOGLE, AMZN and MSFT. In 2012, INTC publicly acknowledged GOOGL as a top 5 customer, and given that GOOGL’s capex has more than tripled since then, it seems almost certain that it is now INTC’s largest server customer. AMZN and MSFT are very likely close behind.
Last week, MSFT, at the Open Compute Summit confab, affirmed a commitment to qualify ARM-based processors for its datacenters. Despite this, we believe any transition from the x86 architecture to be very, very slow. Cloud operators have many billions of dollars invested in their datacenters, which feature multiple server designs assigned to different types of workloads. It is likely that a phase in of ARM processors would start as a single use case, take may years, and would be unlikely to be comprehensive. Moreover, INTC, with its Nervana and Altera acquisitions, is hoping to make an architectural play for AI workloads. If successful, this could partly offset competitive processor losses to QCOM, AMCC and other ARM-based CPU alternatives.
Automotive semiconductors could be another life saver for INTC. The silicon content of the nearly 100M vehicles manufactured annually is expected to grow and shift beyond the vehicle control, safety and infotainment systems that make up its bulk today. Currently, a modestly equipped mid-range vehicle has some $350 in semi content, while a high-end luxury car with infotainment and ADAS systems has over $2,000 of semi-content. Autonomous vehicles, utilizing electric drive systems laden with sensors including cameras, radar, and lidar as well as connectivity hardware, will likely feature additional semi content of well over $1,000 per car, even with economies of scale. For INTC, with about $60B in revenue, even a modest share of this $70B+ potential market could yield substantial upside. Our work on the self-driving car opportunity can be seen here. (http://www.ssrllc.com/publication/autonomous-cars-self-driving-ambition/)
The MBLY acquisition coupled with the Altera FPGA business and other recent acquisitions like Nervana and Movidius give INTC the possibility of a comprehensive automotive package, with solutions ranging from infotainment, ADAS, communications, to AI and autonomous driving. While fully commercialized autonomous vehicles are still a few years away in the future, MBLY gives INTC some near-term automotive revenue and synergies. We expect the market for ADAS solutions will remain robust especially as OEMs add these features to more mid-market and lower end vehicles. MBLY also gives INTC some inroads into potential automotive OEM customers. To date, INTC has been the new kid on the block in automotive and its only notable autonomous vehicle design wins have been Delphi and BMW, each of which came through the partnership with MBLY. Importantly, Delphi is a major auto-supplier that in turn sells into most OEMs and could potentially enhance INTC’s positioning for design wins going forward. Beyond these two, MBLY has deep relationships with several other important OEMs, who have deployed its ADAS systems.
We believe that the race to full autonomy will be won by GOOGL, BIDU and Uber, all of whom are looking to enter the market with fully autonomous fleets offering transportation on demand. MBLY does not help INTC make inroads with these pioneers. Still, private vehicle sales, equipped with a slowly advancing suite of automated driver assistance technologies, will be most vehicle sales for many, many years. INTC/MBLY joins QCOM/NXP and NVDA as the main rivals in the competition for design-ins with the world’s automakers. Perhaps, with more aggressive investment, INTC/MBLY could bring its fully autonomous solution to market in a window that would allow automakers to effectively compete with the three AI leaders. If so, the deal will have paid for itself many times over. In the end, this is an expensive, aggressive and risky deal, but the alternative for INTC could have been a long slow drift into irrelevance. For investors, the risk of failure is probably better than certainty.

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