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Intel – On the road to nowhere?

Theo Maas – Portfolio Manager Arnhem Global SMA’s

Intel recently announced that it plans to acquire Israeli company, Mobileye, in an all-cash deal for US$15bn, or a 36% premium to the current share price. Mobileye is a chipmaker that specialises in cameras and sensors that help car manufacturers make their vehicles more autonomous. One of the key elements to the future of driverless cars is the ability for vehicles to ‘see’ what happens around them. That can be through a combination of i) Radar (measuring distance through radio waves), ii) Lidar (measuring distance through laser light) and iii) Cameras. Mobileye is specialised in the third category. The company is still in its infancy, especially when compared to the US$60bn of revenues that Intel generates, with an expected FY17 revenue of US$500m and net income of US$250m. In other words, Intel is paying a big price for this asset (a P/E multiple of 60x). Given that Intel is sitting on US$17bn of cash, it will make little impact to its balance sheet quality, and given the size of Mobileye, it will not have a meaningful impact on the P&L either.

So why is Intel buying this company? The main reason is that Intel sees the market for components and systems for fully autonomous vehicles as the next big thing; expecting it to grow to a US$70bn market in 2030. Intel is poorly positioned for this market, as its traditional CPU-model is not well suited for driverless cars. Despite trying to build a capability organically, the company has now conceded that it needs help. Other leaders in this area, like Nvidia (which we own in our SMA portfolios), Qualcomm (that is in the process of buying NXP) and Google (that is building an in-house capability with Waymo) have taken the majority share of this nascent market.
One of the most interesting statistics that Intel recently shared is the amount of data that will be generated by a fully autonomous vehicle. Intel estimates this to be 4,000 gigabyte (or 4 terabyte) per vehicle per day!

Source: Intel

This has significant consequences for all the layers in the food chain of autonomous vehicles:

• This enormous amount of data that is collected by sensors needs to be processed by the primary processor in the car. Nvidia’s Drive PX2 is one of the leading products in the market. This is where Intel and Qualcomm want to play a role as well and hence the acquisitions of Mobileye and NXP respectively.

• The data needs to be shared with the outside world. This is where we will need to see the roll-out of next generation wireless networks (5G) that have the characteristics that are needed; i.e. low latency and high throughput.

• This data needs to be stored and mined. This is where companies like Equinix and NextDC as data centres and Amazon Web Services and Microsoft Azure as data platforms play a role.

I don’t believe that this acquisition by Intel fixes their problem to successfully compete with Nvidia and Qualcomm in this fast growing market and I am not surprised to see the negative reaction from the market last night (Intel was down 2%). Intel will have to revert more R&D dollars to autonomous vehicles and will in all likelihood need to acquire more external expertise before it can close the gap.

We remain comfortable with our holding in Nvidia for the Arnhem Australia+ and Arnhem Global Growth SMA portfolios.

Find more information on the deal here.

This article has been prepared by Arnhem Investment Management Pty Limited ABN 17 129 606 775, AFSL 332484. It has no regard to the specific investment objectives, financial position or particular needs of any specific recipient. You should seek your own professional advice in relation to any financial product referred to. You should also obtain the product disclosure statement relating to any financial product referred to and consider the statement before making any decision about whether to acquire the financial product.

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© Arnhem Investment Management, 2017