Mobileye (MBLY), which designs and develops software and related technologies for camera-based advanced driver assistance systems, reported earnings on July 26 which beat both top and bottom line estimates with 58% and 45% increases respectively. The initial reaction was for shares to tumble some 16% to a session low of $42 before recovering somewhat to finish at $45.35, still off 8% on the day.

So what caused this big bump in the road? News the company would discontinue providing its computer chips and algorithms to Tesla (TSLA) after a current contract ends due to disagreements about how the technology was deployed.

Before you take this as earth shatteringly bad news at face value be aware; Tesla represented less than 1% of MobileEye’s sales. And if Musk managed to ramp up production to his pie in the sky levels of 500,000 units by 2018 it would still be less than 2% of the market or MBLY’s business.

Now consider the reason for exiting the agreement; MBLY is basically indicting TSLA for misusing the technology Amnon Shashua, its Chief Technology Officer, citing the recent fatal accident involving Tesla vehicle while using the “auto-pilot” as reason saying “I think in a partnership, we need to be there on all aspects of how the technology is being used, and not simply providing technology and not being in control of how it is being used”.

Given the press coverage of that accident and the questions it raised regarding self-driving cars, especially the importance Tesla has placed on it as a key feature to its future this news should have been explosively negative to TSLA. Yet it’s shares actually gained 0.3% on the day.

Think about this for a second and you’ll realize how powerfully myopic the investment cult of Musk has become; MBLY makes decision based on both smart economics and sound principles regarding control of its intellectual property and it gets punished.

Tesla loses a key and not easily replaced supplier and has its safety practices questioned and everyone shrugs. Musk tried to put a positive spin on in a written response “This was expected and will not have any material effect on our plans,” but failed to indicate what those plan or what company or technology would replace Mobileye’s.

It may be too soon to go back to shorting TSLA, though I still think the shares will be below $100 by the end of 2017, but it does present a great buying opportunity to buy Mobileye .

The unwarranted selling had the chart fill the gap and now offers a good long entry below $50 a share.

Open Road Ahead

It’s often said when presented with a gold rush the best investment is the picks, axes and pans that stand to be sold, rather than being the one standing in long line along the cold stream.

Right now there is a bit of a land rush into the world of driverless cars with everyone from that that actually manufactures cars such old line BMW and Nissan and to the “disruptors” such as Google (GOOGL), Apple (AAPL) and of course TSLA all looking to insert themselves into the next generation of vehicles.

Mobileye is poised benefit no matter who or how this inevitable evolution in transportation plays out and is my top pick to profit from the trend towards assisted driving that is gripping the automobile industry. Note, I did not call it “driverless’ car. It will be a long time before manufacturers, insurers, and passengers hand complete control and responsibility to machines.

Mobileye creates propriety software such as EyeQ chips that perform detailed interpretations of the visual field to anticipate possible collisions with everything from other vehicles, to pedestrians and pigeons. It also is able read traffic signs and traffic lights.

Agnostic and Ubiquitous

Mobileye’s software is already embedded and being used by all of the major players from the original equipment manufacturers, to tier 1 system integrators, and third party retail resellers. Insurance companies are even starting to offer discounted rates for vehicles equipped with the safety feature software.

Here is a short list of recent deals and alliances ripped from the recent headlines:

General Motors (GM) gets help from Mobileye to speed up development of self-driving Chevrolet Volt plug-in hybrid cars.

Baidu (BIDU) which is allied with Uber — is working with Mobileye and in March said that a car that drives itself but lets a human driver take control when needed would be out later this year.

Ford Motor (F) has partnered with Mobileye to invest $1.8 billion over the next five years to autonomous driving and other smart-car features for the China market, as the tech sector looks to shake up the global auto industry.

The upshot is Mobileye is not only already embedded in the existing “driver assist” technology being installed but is laying the groundwork to be the defacto software going forward.

And this brings us to the crucial point; Mobileye’s technology is not simply a commodity. It has a first mover advantage in which it building an ecosystem which is creating a competitive moat.

Back in March Citron Research, widely followed short selling firm most recently responsible for the dismantling of Valeant (VRX), issued a bearish report on MBLY causing shares to tumble some 15% in a two day period.

Citron’s bear thesis was based on statements such as “while Mobileye is a “pioneer” in automotive safety, the company doesn’t have any patents to protect itself from the competition or any long-term commitments from car companies that could give it an advantage.”

I hope the above referenced articles have dispelled that notion.

Citron went on to say, “major automotive suppliers Continental and Delphi Automotive are already building their own ADAS businesses. While Mobileye entered the market early, these big players have a much better chance in profiting from ADAS. Citron mentioned that Mobileye only spent $56 million in R&D over the past 18 months, far short of its competitors.’

What Citron fails to recognize is the reason Mobileye’s R&D spending has slowed is because its earlier investments are starting to pay off. This is paying off in two ways:

• Mobileye now has 13 years of data-collection from its driver-assistance ADAS chips and software, millions of miles of traveling data giving the company essentially a monopoly on the information needed for autonomous navigation.
• Reduced spending is accelerating the company towards profitability.

The above was evidenced when in Mobileye’s delivered its earnings report on July 26 which had $83 million in revenue and 18c per share in profits on 15 a basis point expansion in margins; the third consecutive quarter in which all three metrics increased by more than 40% over the year ago period. The company is clearly moving towards increased and sustainable profitability.

The Trade:

Semi-autonomous and autonomous cars are likely the future of the automotive industry, and applications are growing. It’ll bring big changes in the automotive space and Mobileye is well positioned to benefit no matter how it plays out.

I want to use a long term LEAP call spread option to participate in this journey.

-Buy January 2017 $50/70 Call Spread for $3.75 Net Debit

I think shares of Mobileye could be above $70 within the next 6 months which would make the spread worth $15 for a 360% gain. Driver, take me to the bank.