The first week of a market year usually mirrors the last week of the prior year. There isn’t a lot of news, and often the trading unwinds whatever happened over the holidays. We saw that last week: the S&P 500 dropped 1.5%. The Nasdaq Composite and Russell 2000 fell over 3%. The jobs report beat expectations but did not really shake things up. It was a quiet week, except, maybe, for Mobileye investors¹.

Mobileye announced bad news on Thursday. That bad news had ripple effects on several other stocks. In this week’s Long and Short of the Markets, I’ll use that as a jumping point to talk about why stocks move from day to day. And while you don’t have to pay attention to those moves – and may do better off ignoring them – sometimes they can be opportunities.

Why Stocks Move

Stocks, over the long term, track the earnings of the underlying company’s business. If we knew what the earnings picture for a company would be over the years ahead, it would make our lives simpler. Since we don’t, there are a number of things that can move a stock in the near-term, some of which matter for earnings and some of which don’t. Here’s one list of five types of reasons for stock moves:

Direct effects

When a company announces news about its business, that may move the stock. This is the easiest to spot, and usually the most pivotal. An earnings report is better or worse than expectations. The company hires a new CEO or fires their old one. The company announces an acquisition or, even more directly, announces it is being bought. Anything of this vein can move a company’s stock. In our example today, Mobileye’s news had a direct effect on its own stock.

3rd party effects directly about the company

If a company is big enough, it will attract attention. Sell-side analysts might change their rating on the company. A news organization might break a story about the company. the company – sell-side rating goes up or down. A well-known investor might explain why they own shares or are shorting shares. A 13F form is an official way for these investors to reveal their positions.

Each of these things can move a stock. They all either have something of import for the company’s business performance, or they have a second-level hint. If that smart person thinks that about Company X, maybe I should too! Such is life in the market.

Vague effects

Stocks will often move for no clear reason. Especially as you get to smaller companies, there’s not a lot of news coming out week to week, so they surf on the market’s waves. If the last major news story, like an earnings report, was positive, the stock might keep good momentum until the next quarter. Momentum can fuel itself as mechanical trading plans come into effect. Stocks will loosely follow the market as a whole – if the S&P 500 is up, most stocks might be up too. Or there may be rotation, where certain sectors go up or down. There’s not a lot to do with these except be aware.

Rumors or whisper effects

We get even murkier when we hit suspected effects under the waters. Think of these as cases where a stock moves in a way contrary to the normal ‘vague’ effects you would expect. It could be nothing, but it could be a leak about an activist taking a position. Or hedge funds might have received ‘alternative data’ (credit card usage reports, e.g.) and traded on them. Or in the extreme, leaks about acquisitions or bad earnings reports might get out there. There’s still not a lot to do with these, though if you see something really contrary to the norm, it’s worth being on alert.

Read-Through Effects

If I were ordering things neutrally, I would have put this after 3rd party effects directly about the company. But since we’re discussing read-through effects, I conclude here.

These are things where company X reports news, and the market reacts by trading companies Y, A, B, and Z. A report about Apple’s newest iPhone would affect chip suppliers to Apple. Pepsi’s results might affect Coca Cola’s stock and vice versa. And, in today’s example, Mobileye’s bad news might rub off on other companies. Think of this as the “if X sneezes, Y gets a cold” concept. 

What happened to Mobileye?

Mobileye is a semiconductor company. It makes systems on chip (SoCs) for advanced driver assistance systems – “ADAS” – with an eye towards supporting autonomous vehicles, i.e. self driving in one form or another. It adds some software to the process and doesn’t call itself a semiconductor company, but it is primarily owned by Intel, and it works most closely with semiconductor companies before selling to automobile companies.

Source: Mobileye’s website

Last Thursday, it published a press release and SEC filing. In it, the company pre-announced Q4 2023 results and guidance for 2024. Q4 2023 results were fine – ahead of expectations, if only slightly. 2024 guidance, though, was not good. 

Mobileye said sales would drop in 2024, and its losses on the bottom line would increase dramatically. Mobileye has not been profitable in its latest incarnation as a public company². That positions it as a growth company. For sales to drop and profitability to worsen, that’s bad.  

Most of the pain will be in Q1, with sales expected to be half of what they were in 2023. The rest of the year, the company will grow slowly compared to 2023, which as a net means it will drop vs. 2023.  

Mobileye shares dropped about 25% on Thursday, the day the news broke. It recovered a tiny bit the next day, but the market capitalization dropped $7.4B in two days. And when Mobileye sneezed, several other semiconductor companies got sick. Which epitomizes a read-through effect.

Mobileye’s Ripples

I’m not going to do an analysis of the autonomous driving, because I don’t know enough about the industry and it’s not so important for this post. More important is Mobileye’s explanation for why its sales will be poor next year.

I’ll quote the key sentences from the press release: 

“we have become aware of excess inventory at our customers, which we believe to be 6-7 million units of EyeQ® SoCs. Based on our discussions, we understand that much of this excess inventory reflects decisions by Tier 1 customers to build inventory in the Basic ADAS category due to supply chain constraints in 2021 and 2022 and a desire to avoid part shortages, as well as lower than-expected production at certain OEM’s during 2023.” 

Mobileye press release/SEC filing

There are a couple scary things here, but then perhaps one reason to think this is more specific to Mobileye.

Scary thing #1 – building up inventory due to supply chain constraints

 One of the things that has made investing in the 2020s both so challenging and so opportunity rich is that the economy has not worked smoothly. Shutdowns, shortages, constraints, blockages lead to unusual effects that not only don’t repeat, but get unwound.

If auto companies built up a huge backlog of chips to deal supply chain problems, and then the problems fix themselves, they’ll probably revert back to how they ordered before the supply chain problems. Which means, at the least, a period of low orders to clear the backlog. And at the most, that semiconductor companies build up too much capacity, hurting returns for a longer time period.

Semiconductors had a great 2023, in part because of excitement over AI, but has already gone through a backlog and then release cycle in 2021-2022. Another cycle would bode ill for the sector. 

Scary thing #2 – lower than-expected production at certain OEM’s  

This is a more localized issue. But if OEM’s – original equipment manufacturers, i.e. car companies – produced fewer cars than expected, that would be a problem for suppliers.

Semiconductor companies that supply cars – both for electric vehicles and because cars as a whole have more electronic stuff in them, the ‘electronification of cars’ – were a bright spot in the sector not just because of stock performance, but also their underlying financial performance. If fewer cars are being made than expected, or fewer electric vehicles are being sold, Mobileye will not be the only one to suffer. 

Why this might be a Mobileye problem

But, there are a couple reasons to think this is a specific to Mobileye issue.

First, Mobileye’s ADAS products are a specific product. I.e. it’s not a generalized chip to fuel touch screen radios. It could be that there’s less specific need for Mobileye’s systems. I will say my one known experience with a Mobileye product, I was ready to take a baseball bat to it by the end of the week. I could be biased. 

Secondly, it’s worth remembering that there was a United Auto Workers’ strike, which may have crimped production in Q4 last year. It’s unlikely to be the whole cause of this problem, but it could have exacerbated the issue. 

Where the Read-Through Effects Hit

When we scan the read-through or knock-on effects to Mobileye, we get a curious mix. And while markets are not always efficient, they’re usually good about tagging companies for these effects. They often overdo it, but they get the read-through targets fairly well. 

STMicroelectronics (STM) is one of the most obviously affected. 45% of its 2023 sales have been in the automotive segment. And, because STMicroelectronics is Mobileye’s primary semiconductor supplier and maker, Mobileye’s sneezing means STM has the sniffles as well. Its shares dropped 5% in the two days after the news. 

onsemi (ON) is another company whose business has thrived due to the increased use of chips in cars³. But its shares dropped 4.5% on this news. ON had already plummeted 22% for its Q3 earnings report. It pointed to European carmakers ‘working through inventory’ and a ‘single automotive OEM’s reduction’ as reasons its Q4 guidance was weak. (Mobileye’s shares dropped 3.5% on the read-through that day). 

Curiously, Intel (INTC), the main owner of Mobileye, didn’t see shares drop much. Shares are down less than half a percent, even though in theory Intel’s stake in Mobileye dropped some $6.5B worth in value, or over 3% of Intel’s overall market cap. Mobileye is relatively small compared to Intel, but the math would suggest there should have been a bigger hit. 

Acting on a Read-Through Effect

One last example, because it affected my portfolio, is Axcelis Technologies (ACLS). Its shares dropped 4% on Thursday, before recovering a little on Friday.

Axcelis is one step removed from the auto companies: it makes equipment for semiconductor factories to then make these sorts of chips. Still, it is in this supply chain, and the issues Mobileye and ON are facing should, in theory, wash up to it. The market is not dumb to read through, here. 

I had mentioned that Axcelis shares were getting attractive again after a big first half of 2023 and then a not quite as big fall back. My first new buy orders on Axcelis since summer 2022 were filled last week. I bought not because of the read-through, but the read-through became the last push to drop the share price.

There are reasons the read-through could be wrong. When onsemi had its problem in October, Axcelis reported that it wasn’t seeing the same issues. Q3 call, and continued to project two years of growth.

And interestingly, one of Axcelis’s biggest risks may be offsetting the problem. The risk is China: that Axcelis sells to companies there, and that the U.S. government might restrict those sales at some point. The benefit is that Axcelis has exposure to other countries, and perhaps that insulates it a little. Though, to be fair, ON and Mobileye both sell to China and around the world as well. 

It’s possible and probable that eventually, the industry will have built up all these mature chip production lines and not need as many new Axcelis machines. That’s the big underlying risk in buying more shares in a company like this. But, it’s also possible that these specific companies have challenges, and that the read-through effect may have been overdone. 

Opportunism vs. long-term patience

One doesn’t need to follow their stocks on a daily basis. I’d argue that it’s healthier to look only once a week or once a month, and focus instead on learning more about the industries involved, or the company’s management, or more long-lasting things. That’s all easier said than done – it’s a rare day that I’m not watching my portfolio the full 390 minutes that the market is open.

When we’re following stocks more closely than we should, we will see a lot of moves in our stocks. We can use the above list to categorize those moves. And we should remember that what matters most is where the company’s earnings go over time.

One way to follow that is to just read the quarterly reports, transcripts, and filings to make sure the company is on track. These in-between events can help fill in the gaps between those reports, or they can be misleading. If you end up following more closely you’re going to come across them. We should try to understand how important a given news item is, and how it fits into the long-term context of a given company’s outlook. 

Mobileye has clearly caught a winter virus. Whether that will be contagious for the rest of the sector remains to be seen. But it’s certainly worth being on alert. 

Interested in more from Middle Coast Investing? Or in talking to us? Get in touch.

Disclosure: Middle Coast Investing clients and portfolios have long positions in ACLS and AAPL. Positions may change at any time without notice. Nothing in this post is investment advice.

1. And Boeing investors, but that news happened over the weekend. ↩︎
2. Intel bought Mobileye in 2017; before 2017, Mobileye had been profitable in at least a couple years, on a net income basis. ↩︎
3. For context on how much shares have risen: I once owned onsemi shares from $7.25-$12.25 or so in 2013-15. Its shares closed Friday, January 5th trading at $75.70. Most of that rally came in the 2020s. ↩︎