Dear Reader,

As I predicted, Intel just couldn’t sell its desired valuation for the forthcoming Mobileye IPO.

We had a look at Intel’s plans a few days ago, on October 11. Intel was originally looking to spin out Mobileye at a $50 billion valuation.

Remember, Mobileye is a semiconductor company for advanced driver assistance systems (ADAS) that Intel acquired for $15.6 billion in 2017.

By the time of its IPO filing, the expectation of valuation had lowered to around $30 billion. As I wrote on the 11th:

That’s a valuation of 17.7 times annual sales… for a semiconductor company. For comparison, Intel trades at an enterprise-value-to-sales multiple of 1.61. And NVIDIA, the most valuable semiconductor company in the world, trades at an enterprise-value-to-sales multiple of 10.5.

Intel is dreaming.

Yesterday, Intel announced the targeted valuation has dropped to around $16 billion, representing about a two-thirds decline from its original expectations. Ouch. That must hurt.

Rather than being grounded in a solid valuation, $16 billion is more of a number that would allow Intel to conduct the IPO at a level just above where it bought Mobileye back in 2017. To save face?

That’s like ascribing the valuation multiple of NVIDIA, the most valuable semiconductor company in the world, for a less attractive business. Put more simply, NVIDIA isn’t an appropriate comparable to set the valuation of Mobileye.

Wall Street knows that, but that doesn’t mean it won’t sell it.

A more appropriate valuation for the IPO would be in the $8 billion to $9 billion range. That means if the IPO does happen at $16 billion, there’s significant downside ahead in the next six months. It also means that we have a good idea of when we might consider building a position in Mobileye… when it hits that valuation range.

Of course, we’ll have a lot more information to make an even more informed decision after the company goes public, and after we’ve reviewed at least one or two quarterly earnings reports.

Until then, we’ll sit back and watch the fireworks and avoid being taken for a ride...