Name That Trade -$MBLY: Veering Towards the Guardrail?

by Dan November 25, 2014 1:40 pm • Commentary

Mobileye (MBLY) is one of the most successful IPOs of 2014, gaining 84% since its July 31st offering.  The stock now sports a market cap of almost $10 billion.  There is no doubt about it, the stock has benefited from the strong performance of Tesla (TSLA) up 65% ytd, as MBLY’s Advanced Driver Assistance Systems (ADAS) is used in TSLA cars, despite TSLA supposedly developing its own system.

This is one of the fairly tough stories to figure out in my mind, and it’s important to try to seperate the prospects for the company vs. that of the stock.  The problem with a $10 billion market cap out of the gate is that the company is only expected to have $220 million in sales in 2015, and $350 million in 2016, with minimal earnings.  So from a valuation standpoint, the path to $1 billion in sales is likely to be fraught with potholes that their tricked-out visioning systems may not be able to see.

The prospects for the company may be fantastic, as they appear to have years of lead time on many of their closest competitors.  If that holds, then MBLY may have an open runway for years prior to any real pricing pressure.  Obviously there are lots of trends that need to pan out, like a massive secular trend in driverless cars, but if there is any evidence of a massive shift to new driverless technology, MBLY’s $10 billion market cap could be viewed as small.  But right now, trading at 45x next year’s expected sales, the stock would have to fall in one’s very speculative basket of equities.

The stock has actually traded fairly rationally after doubling from the summer lows to the October highs.  The stock has pulled back and has consolidated a bit between $45 and $55 on declining volume:

MBLY since July 31st IPO from Bloomberg
MBLY since July 31st IPO from Bloomberg

For those looking to take a near term directional view, implied volatility, the price of options, has come down fairly substantially with the sideways action of the stock over the last couple months.  30 day at the money IV (blue line below) is down from a high of 91.85% in mid Oct to a new low of about 50%, while realized vol (white line below), how much the stock has been moving, has also been making new lows:

MBLY 30 day at the money IV vs Realized Vol from Bloomberg
MBLY 30 day at the money IV vs Realized Vol from Bloomberg

The next identifiable catalayst is the 180 day IPO lock up expiration on January 28th (see discussion below of how much stock), and then the company’s Q4 results that should fall in March expiration.

For those that think the stock could see weakness into the Lock-Up, selling Jan premium (that captures the holidays but NOT the Lockup) to finance the purchase of longer dated puts could make sense.

Despite the decline in options prices, they remain expensive and wide.  In some expiries, there is not a ton of open interest. Owning premium seems like a losing trade, so it makes a ton of sense to look for ways to finance.

So the stock has appeared to have lost some momentum, making a series of lower highs and lower lows.  With what should be some quiet holiday trading over the next few weeks, and the impending IPO lock expiration, setting up for a move lower, despite the stock’s 33% short interest, appears to be an attractive set up with defined risk.

We are not going to place this trade now, but very interested in the structure and the thesis.

TRADE: MBLY ($46) Buy to Open Jan / March 40 Put Spread for 2.10

-Sell to open 1 Jan 40 put at 1.30

-Buy to open 1 March 40 put for 3.40

Break-Even on Jan expiration: the ideal situation is for the stock to close at 40 on jan expiration at which point the calendar could be rolled or turned into a simple vertical in March. Max risk is 2.10 with the worst case scenario being a dramatic move higher or lower from the targeted strike.

Rationale: This structure finances options that catch the end of the lock up period by selling those that expire beforehand.

Lock Up:  from what we can tell there is 212 million shares outstanding, and an existing float of about 45 million, leaving the potential of 167 million shares to be free to trade after the 180 day lock up expires on Jan 28th.

From the IPO registration document (here):

Lock-up Agreements
We, along with our directors, executive officers and holders of substantially all of the Company’s ordinary shares, including the selling shareholders, have agreed with the underwriters, for a period of 180 days following the date of this prospectus, not to, directly or indirectly, offer for sale, sell, contract to sell, transfer the economic risk of ownership in, grant any option for the sale of (including without limitation any short sale), pledge, transfer, establish an open “put equivalent position” within the meaning of Rule 16a-1(h) of the Exchange Act, or otherwise dispose of any ordinary shares or options to acquire ordinary shares or any security or instrument related to such ordinary shares or options, whether now owned or hereafter acquired, or publicly announce the holder’s intention to do any of the foregoing, subject to specified exceptions. Goldman, Sachs & Co., in its sole discretion, at any time may release all or any portion of the shares from the restrictions in any such agreement.