VLDR - Investing In Lidar In 2023 Ouster Remains My Bet

Summary

• Quanergy bankruptcy illustrates that lidar companies remain as high-risk investments.
• Ouster and Velodyne merger will build a solid business, profitability coming in 2026?
• Luminar and Innoviz destined for greatness? Not so quick.
• Avoid Aeye and Cepton for the shortage of cash. Avoid Aeva due to lacking catalysts.

Introduction

The article is a quick look at what is happening in the industry before Q4 results. It is a snapshot of the info for new investors who may look at the names mentioned here with interest and be drawn to future projections. However, it is a cautionary tale, full of many hiccups and risks. Nothing is for sure yet, despite possibilities that can exceed the most advanced forecasts. It is an industry that can potentially deliver many years of good returns, and I believe it will produce a couple of winners.

I wrote a few articles building my investment thesis on revenue potential and cash availability to support profitless enterprises until their operations can support them. My thesis of cash being king delivered its first casualty in the case of Quanergy (QNGYQ), which had filed a voluntary bankruptcy late last year. Quanergy has settled its patent loss with Velodyne for $2.2M, but it is unclear what will be paid post-bankruptcy sale. In my estimate, relatively little, if anything, unless Quanergy will continue to operate privately.

While Quanergy is disappearing from public markets, picking success in the industry remains covered by a fog of confusion about who will emerge as a winner.

Market darlings

For now, the market has placed the biggest bets on two companies, Luminar ( LAZR ) and Innoviz ( INVZ ), with Luminar's capitalization greater than all others combined.

It is almost explainable why this happened. Luminar showcased Volvo ( VOLAF ) EX90 during CES 2023. It also showed the SAIC Motor Rising R7 model. Both OEMs have been highlighted as future revenue-generating customers. Polestar ( PSNY ) is also announcing the placement of Iris on its cars. On February 2nd, a news release told us that the second Polestar model would carry the Iris sensor option. More are coming. The company promised to reveal more details about this ongoing development on February 28th, Luminar Day.

The thing to watch out for about Luminar is that by the time of the Q4 report, the balance sheet will show negative equity, which stood only at $42M in Q3. The cash on hand is high, but it is propped by $611M in convertible debt, an amount greater than the company's total current assets. The debt is not convertible till 2026, but the financial condition is already making many doubts about the future execution. Luminar is unprofitable like everyone else in the sector. There is no offsetting mechanism for spending cash with income. In the first three quarters of 2022, Luminar spent $239M. There is $553M left, but the costs will increase with manufacturing efforts.

On the technology front, Iris's bulky design, which has to be incorporated into a vehicle, does not conform to the expectations of the sensor definition. An approach to making "Luminar inside" branding is the answer to a significant form factor (table below), leaving nothing to the imagination about the unit sitting on the roof of a car. I have no doubts that Iris can still be placed on many vehicles, but sales of those vehicles will dictate how successful the design is, and I am not optimistic those aesthetics are the winner. Not for the long term.

Remarkably, the company has a capitalization of $2.8B, a book value per share of 12 cents, and a price to book ratio of 64 times.

Innoviz is planning to hide its sensor in the body of the vehicle. Its sensor, InnovizTwo, is much better than Iris, and its promised specs are likely the reason for winning the Volkswagen design deal. But the smaller version is yet to produce a B sample, and it will not likely be on the market until the second part of this decade.

Innoviz is healthier financially, as its cash is free of covenants or debt. The company's shareholders' equity stood at $220M in Q3, with a book value of $1.63. However, with cash of $217M at the end of Q3, spending about $30M per quarter, Innoviz will need to reach out to the market for the equity offering. It might have done so in the form of an ATM. Valued at $788M, Innoviz's immediate revenue potential comes from the BMW I7 model, which will likely produce little revenue in 2023. Analysts estimate around $30M for the current year, but that sounds high based on projections of a few thousand I7s to be sold in 2023. The company also has a sensor for the non-automotive market called Innoviz360. It will be interesting to see how it fares against existing players of the spin category like Ouster (OUST).

Middle of the road

In my November article , I wrote about the merger of Ouster and Velodyne ( VLDR ).

The most recent prospectus offered the new, combined company revenue estimates (table below). They vary, but it seems that 2026 would be the year of profitability, unstated by either company but assumed by me. Projections portray a loss anywhere from $160M to $250M in the next three years till the end of 2025. That estimate produces a cash deficit to cover the operations, even though the two companies had $310M of cash by the end of Q4, as recently it was announced. New Ouster will likely look for cash sometime in the future.

The development of the automotive solution from Ouster, DF (digital flash) seems to be on the pathway of the B sample at the end of the year. I looked at images of it at CES 2023, and the sensors looked larger than those presented during CES 2022 but smaller than anything else in the market. I have no details on the specification, which implies the sensor is still in the early stages of development.

In a recent update, shareholders approved the merger of Ouster, but Velodyne needs to take another count by February 3rd. I remain optimistic about Ouster and its technology. Hopefully, post-merger growth will be secured with Velodyne relationships and supported by cash injections.

Wait-and-see approach

Finally, There are three companies that I do not feel like are offering a lot to the investor today, and I would wait and see what they can do in 2023.

Cepton ( CPTN ) made a surprising prototype improvement to its sensor with the introduction of Vista 120X-Plus. With a height of just 3cm, the lowest thickness to date by anyone. Cepton has created its own technology MMT, which in my opinion, carries an inherited risk of being limited for further development. Financially, most recently, shareholders of the company approved the issuance of the preferred stock to Koito ( KOTMY ) for $100M in cash. Cepton had about $21M of cash in Q3, and since the transaction only closed on January 20th, Q4 might look like Cepton is out of money.

I see Cepton spending that $100M in 2023, having estimated $25M in revenue in analysts' expectations. We know the GM (GM) model carrying Cepton's sensor will be Cadillac CELESTIQ EV. So this is a limited revenue opportunity, and I think $25M is way too high. I do not believe Cepton's technology will become mainstream for lidar sensors, but at the same time, I do not think Cepton is going away because of their relationship with Koito.

AEye ( LIDR ) had $112M in Q3, and it has been trading now for over 30 days below $1, so the company received a warning letter about delisting. The only notable thing about Aeye is the abnormally massive size of the MEMS sensor (table) and the sensor developed with technology licensed to Continental for production in 2024. Both are unremarkable in comparison to InnovizTwo. Innoviz looks much more promising for a member of the same technology faction ( MEMS ), which makes Aeye unattractive for investment purposes just for that reason.

Finally, Aeva ( AEVA ). I am not excited about the sensor size, the deals, or the production expectation sometime in 2024. The company may surprise me here, but with projections of $19M in revenue in 2023 and spending more than $100M per year, it is a most apparent "wait-and-see" condition.

Conclusion

The market most recently stopped ignoring Ouster and Velodyne, where I see the most significant potential. The logic of revenue growth and the path to profitability seems much more straightforward and more immediate. Luminar is in a complex financial state and appears too risky, despite the appearance of being ahead of all others in the automotive consumer sector. Innoviz, further from revenue than Luminar, is still developing its product before mass production. There is no guarantee it will be successful. All companies outside of Ouster have negative margins, another reason why Ouster can get Velodyne's business to the next level and why I am invested in it.

Cepton, AEye, and Aeva have too many unknowns clouding the situation, with one optimistic factor about Aeva being the level of cash on hand.

I will review the Q4 and year-end of 2022 results adding a more granular perspective on cash-level estimates and potential for 2023. It would be fascinating to learn what new Ouster has to show when it emerges post-merger. Finally, there is competition from China looking to IPO in the US markets. Hesai is a leader in volume sales of lidar, and the company is looking for $160M in its offering. Undoubtedly an existential threat to Western-based businesses, Hesai is also a political/strategic issue as foreign lidar may be banned in China, impacting Luminar the most. Banning Chinese sensors in the US and EU as retribution would block Hesai, Robosense, and others, making the turf accessible to local companies. The benefit would not land on Luminar but given the most significant win to Ouster and its family of REV7 sensors.

For further details see: