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Mobileye Shares Drop Sharply on End of Tesla Motors Partnership

Shares of Mobileye fell on Tuesday after the company said it would end its relationship with Tesla Motors. Mobileye's EyeQ3 processor is a key component of Tesla's controversial Autopilot system, shown. Image source: Tesla Motors.

What: Shares of Mobileye (NYSE: MBLY) dropped sharply on Tuesday after the car-technology developer's chief technology officer told investors that the company would end its relationship with Tesla Motors (NASDAQ: TSLA). Mobileye's shares were down as much as 15% in early trading; as of noon (EDT) they had recovered somewhat to $46.24, down 6.2% from Monday's close.

So what: Mobileye's EyeQ3 processor chip is a key component of Tesla's Autopilot driver-assist system. Investors had expected that Mobileye's relationship with Tesla would continue with future versions of the EyeQ processor. But during Mobileye's (otherwise very positive) earnings call on Tuesday, Mobileye's co-founder, chairman, and chief technology officer, Amnon Shashua, said that Mobileye would end its relationship with Tesla at the end of the current EyeQ3's lifecycle.

Shashua didn't quite spell out the reasons for ending the relationship, but the strong hint was that Mobileye is unhappy with Tesla's rush to bring driverless technology to market in the wake of a fatal crash involving Autopilot in May. Here's what he said (emphasis added):

Mobileye's work with Tesla will not extend beyond the EyeQ3. We will continue to support and maintain the current Tesla Autopilot product lines. This includes a significant upgrade of several functions that affect both the ability to respond to crash avoidance and to optimize auto-steering in the near term without any hardware updates. 

Nevertheless, in our view, moving forward to more advanced autonomy is a paradigm shift, both in terms of function complexity and the need to ensure an extremely high level of safety. There is much at stake here to Mobileye's reputation and to the industry at large. Mobileye believes that achieving this objective requires partnerships that go beyond the typical OEM-supplier relationship such as our recently announced collaboration with BMW and Intel. Mobileye will continue to pursue similar such relationships.

Now what: At press time, Tesla had yet to respond publicly to Mobileye's announcement. The deal's end won't have a major impact on Mobileye's top or bottom lines, as Tesla only accounts for about 1% of Mobileye's revenue now. But Mobileye had been seen as a key part of the Tesla technology story. That probably played a part in the company's sky-high (44 times forward earnings) valuation. With that relationship ending, Mobileye shares may continue to fall back to earth -- even as the company continues to post revenue and earnings increases and ink new deals with major automakers. 

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John Rosevear has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool recommends BMW and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.