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Intel Should Have Walked Away From the Mobileye Deal

- By Harsh Jain

Intel Corp. (INTC) recently disclosed it has offered to buy Mobileye (MBLY), placing a bid in excess of $15 billion. The news saw Mobileye shares jump almost 30%, putting its market cap roughly in line with Intel's valuation of the company.

On paper, the deal appears to be ridiculous. If you dig deeper however, you will be certain the deal is ridiculous on Intel's part. The company has agreed to pay a massive premium to enter the autonomous car industry by acquiring the apparent market leader that generates a little over $350 million in annual sales of $15 billion.

You do not need to be a fundamental investing genius to figure out the problem with this deal. While it does show the potential for the autonomous vehicle industry, investors should probably avoid Intel after this acquisition. The company was late to enter the market and then made the wrong decision by buying Mobileye for an insane amount of money.

Moreover, Mobileye is an Israel-based company, so integrating it with Intel will be a tough task. Given the fact Intel has $17 billion in cash on its balance sheet as opposed to total debt of over $25 billion, paying such a premium for Mobileye does not make sense.

The autonomous car industry will obviously grow at a staggering pace going forward, but so will the competition in the space. Tesla (TSLA) already ousted Mobileye from its cars, and with the number of competitors expected to increase in the future, I can see the company's strong revenue growth not lasting long enough to justify its valuation.

Summing up

Intel does not have a good track record with acquisitions. The buyout of Mobileye, if it goes through, will further dent its reputation. Paying such a massive premium to enter the autonomous car market does not look like a good decision to me. While it is good news for Mobileye shareholders, I do not think Intel will benefit from the deal.

Disclosure: No position in the stocks mentioned in this article.

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This article first appeared on GuruFocus.