Why Intel Needed To Own Mobileye - Even If It Overpaid

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Painfully, Intel (INTC) has little to no presence in mobile devices, save for a few modem chips here and there. Most everything on mobile devices is ARM-based due to its lower power consumption and cheaper costs. Intel and its -x86 platform simply cannot compete on price or power performance.

Having realized this, Intel has decided to do what any company in its position should do -- try and buy its way into the future, acquiring Mobileye (MBLY) for $15.3 billion.

No Matter the Cost

The acquisition, which is being billed as helping Intel turn into a data company (whatever that means), isn't likely to move the financial needle for Intel anytime soon. 

Mobileye generated just $240.6 million in revenue in fiscal 2016. By comparison, Intel's full year revenue was $59.4 BILLION and its Data Center Group (which Intel is saying Mobileye will fit into) had $17.2 billion in sales.

The Israeli-based Mobileye generated $108.4 million in GAAP net income in 2016, making the deal worth 141 times net income. That isn't exactly cheap, even if Mobileye is growing revenues at 46% year over year.

This deal is about the future of the car, one that will generate more data (thus needing more computing power) than at any time in history. Intel said cars could generate as much as four terabytes of data per day, so it's important cars have the computing power to understand and make sense of all that data.

Mobileye is best known for its role in advanced driver assistance systems (ADAS), having worked with companies like Tesla (TSLA), GM (GM), BMW (in conjunction with Intel) and others to bring self-driving cars to the forefront. (In 2017, another 6 OEMs will come online using Mobileye's chips, according to Jefferies analyst David Kelley.)

Limited Impact

This deal isn't likely to hurt Nvidia (NVDA), which makes GPUs for self-driving cars or Qualcomm (QCOM) or NXP (NXPI), which also makes chipsets for cars. Chips for ADAS systems and the cameras that go into them is a much smaller market than being the brains of a self-driving car platform. However, it's clear that Intel needed to do something to get into this space, or risk losing out like it did with mobile devices.

There is still the risk that car manufacturers will cut Mobileye's units out of its cars (as happened with Tesla), but with Intel's muscle behind it, that seems less likely to happen. Mobileye has deals with a number of auto manufacturers, including Volkswagen and BMW, enough to get its EyeQ chips into 16 million cars by the end of 2016. 

Ultimately, this is a deal Intel had to do. It missed out on buying Nvidia when it should have, as it was too focused on the Altera acquisition. It can't buy AMD (AMD) because of the implications for the PC market and -x86 chips.

The PC market has had little to no growth for quite some time now, leading PC chip makers to wonder what's next. Intel's latest acquisition of automotive chip maker Mobileye shows that under Brian Krzanich, Intel is focusing on the future -- no matter what it costs.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Referenced Symbols: INTC , TSLA , GM , NVDA , QCOM , NXPI , AMD

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Chris Ciaccia

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