In this segment from Motley Fool Money, Chris Hill welcomesSeth Jayson, Andy Cross, and Ron Gross to the radio show to discuss the major deal announced earlier this month between chip giant Intel (NASDAQ: INTC)and autonomous vehicle tech companyMobileye(NYSE: MBLY).
Given Intel's well-publicized plans to transform its business, this full-speed investment in the driverless car industry will be important to follow. But did the company overpay?
A full transcript follows the video.
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This video was recorded on March 17, 2017.
Chris Hill: Deal of the week goes to tech giant Intel, which agreed to buy Mobileye for the tidy sum of $15.3 billion in cash. Mobileye is in thebusiness of autonomous driving and accounts forabout 70% of the global market foranti-collision systems. They've got the money over at Intel, Andy. Buteven though they have the money, this price raised some eyebrows.
Andy Cross: Yeah,I didn't know if you said "tidy" or "tiny." For Intel,it is relatively tiny. They have $17 billion in cash, and this is a $15 billion deal. Intel does $10 billion in earnings. So it's less than two years of earnings for Intel. So in the big picture, for Intel, which does $60 billion in sales, Mobileye is a really small fish. It was all about the growth, Chris, andthinking about where their market is going. Intelhas been down this road before. They did make a verylarge acquisition ofMcAfeein 2011 for more than $8 billion, and now they'reprobably going to end up writing some of that down. Theyannounced last fall that they're going to be selling offpart of it toTPG at avaluation half of what they paid for it. So they'll write some of that down. They did make abig acquisition last year, for another $15 billion, ofAltera. So these are two back-to-back $15 billion deals that wehaven't yet seen; we'll have to see. It will take years for this to play out on the return for Intel shareholders.
Seth Jayson: Yeah,tough to figure out exactly what the price tag meant.I know Andy did some valuation work on this a while ago; so did I. When I did it,it looked like they would have to be selling their product into every car in the world, except there would have to be more cars sellingevery year than there actually arefor it to even begin to make sense. So they're counting onthat technology expanding a lot,or getting something else out of it,perhaps mapping data. Some people have beenthrowing that around, I don't know if I buy it.
Cross: Yeah,interesting. They paid 40 times sales,which is an extraordinary amount, but Mobileye has been growing at 50% a year, but five years ago, it was growing at 100% a year. So we have seensteadily declining rates. Again, plug it into the Intel family, andmaybe they can get a better return for their buck. Remember, we were just talking interest rates earlier. Intel, that $17 billion is making nothing forIntel shareholders. So maybe they're thinking this is a better return on their money than what they can get from keeping that cash on the books.
Ron Gross: So they'llbreak even in about 20 years or soif the growth rate continues. That sounds awesome.
Cross: Yeah,if it doesn't work out, it is arelatively small write-off for Intel shareholders. Not areason to make the acquisition, of course, andhopefully it doesn't work out for Intel shareholders, but it's a relatively little bet for Intel.
Jayson: Youhave to look like a player in self-driving; otherwise all the other kids are going to make fun of you.
Gross:Uber has it.
Hill: Well,that's the thing. This is not a little start-up company. As I mentioned in my opening read, Mobileye has 70% of this market, and they're still not selling enough, to Andy's point, 40 times sales, they're still not making enough to make this look likeanything other than an overpayment for their business.
Jayson: You'rejust not optimistic enough about the future.
Andy Cross has no position in any stocks mentioned. Chris Hill has no position in any stocks mentioned. Ron Gross has no position in any stocks mentioned. Seth Jayson has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.