LAZR - Luminar Aurora MicroVision: Who Wins In The AV-ADAS Tug-Of-War?
Summary
- Previous optimism for the commercialized deployment of fully autonomous Level 4 / Level 5 technologies by mid-decade has only become more distant this year.
- The rapidly deteriorating macroeconomic outlook has only stifled the development of cost-intensive projects like AV development that lack immediate returns, compounding uncertainties stemming from "regulatory obstacles" and other technological challenges.
- In the following analysis, we will dive into names within our coverage across the AV/ADAS supply chain (LAZR, AUR, MVIS), and gauge where they stand within the rapidly consolidating industry.
In our latest coverage on the Apple stock (AAPL), we discussed the auto industry's shifting focus from autonomous mobility ("AV") development in favor of advanced drivers-assistance system ("ADAS") solutions. The slowed momentum in AV development comes on the heels of acute supply chain constraints this year, which have been compounded by macroeconomic challenges that have made the capital-intensive endeavor unfavorable. Uncertain regulatory guidelines over the ultimate commercial deployment of fully autonomous driving have also thwarted the industry's progression. These cumulative factors have instead incentivized pent up demand for ADAS across the auto industry - a readily available technology that also boasts better economics for auto OEMs in the face of rising competition and pressured profit margins due to supply chain constraints and an ensuing increase in input costs.
As previously discussed, the shift in favor for ADAS and the pushed-out timeline on commercialization of fully autonomous vehicles (i.e. Level 4 to Level 5 AVs) is likely to fuel consolidation across the relevant supply chain:
Because of slowed momentum in the development of fully autonomous vehicles (i.e., Level 4 to Level 5), we expect more consolidation to occur within the industry over the near-term, with bits and pieces of the technology that can be applied in both ADAS and autonomous driving taking precedent, and those particular to autonomous driving potentially put on pause until the market environment recovers.
Source: "Autonomous Mobility Takes Another Blow: This Time It's From Apple"
The following analysis will dive into the specific implications to constituents across the AV and ADAS supply chains within our coverage, which includes commercial vehicle AV technology developer Aurora Innovations ( AUR ), as well as lidar suppliers Luminar Technologies ( LAZR ) and MicroVision ( MVIS ). We believe the fundamental resilience as well as the versatility of Luminar's lidar systems and accompanying software solutions makes it a well-positioned share gainer in the autonomous mobility industry, capitalizing on both current ADAS momentum as well as a potential pick-up in AV adoption over the longer-term. Meanwhile, Aurora's AV-focused business model, and MicroVision's persistent struggles in turning its lidar business around increases their vulnerability to challenges from the looming economic downturn, and increases their risks of becoming dropped (or in the better case, acquired) within the rapidly consolidating industry.
The Back-Tracking Trend from AV to ADAS
The intuition for ADAS adoption to take precedent over AV over the near- to mid-term is not difficult to understand. Under the current market climate where investors have largely shifted preference from "growth at all costs" to profitability, and automakers' incentive to produce higher priced and more profitable vehicles and technologies under a supply constrained operating environment, continued development and deployment of Level 2 / Level 3 ADAS features, which still require drivers' full attention, is a good way to bolster margins - especially for legacy automakers looking for ways to bankroll their urgent transitions from ICE to electric vehicles ("EV"), and EV upstarts looking to turn a profit within the shortest timespan possible.
Specifically, advanced Level 2 or even Level 3 systems have been able to help automakers differentiate their products - especially more expensive premium / luxury trims - within the increasingly competitive and capital-intensive industry at little incremental cost of deployment. The additional marginal cost of deploying software is essentially zero, hence the hefty margins that come with them as adoption scales up. And judging by the take-rate on Tesla's ( TSLA ) $15,000 FSD, demand for Level 2 / Level 3 ADAS definitely exists, and is likely more resilient than expected given their appeal to the more recession-resistant affluent consumers of premium vehicles:
L2+ systems may cost between $1,000 to $2,000, so even if automakers turn around and sell them for $10,000, that helps margins.
Source: RBC Capital Markets Auto Recap
Rising momentum for ADAS adoption is also beneficial to those across the upstream supply chain. A Level 2 / Level 3 ADAS system in the $1,000 to $2,000 range is a "meaningful step up from lower level ADAS solutions" that are priced at merely a quarter to half of that rate with minimal profit margins. This is consistent with Luminar's cost profile for its lidar systems, which feature a target bill of materials ("BOM") of just under $500 per unit that can be as little as $100 per unit in the long-run through economies of scale. Sold at an ASP of about $1,000 at Luminar, for instance, which is a feasible component price tag to secure sufficient demand from auto OEMs looking to sell Level 2 / Level 3 ADAS solutions at an additional charge of as much as $15,000 to car owners, that already represents a more attractive margin for suppliers than lower level ADAS solutions packed with hardware that are more costly to produce with little profitability.
Implications for Luminar Technologies
Sentiment : Neutral
The lidar maker's current focus on serving the ADAS market provides it with a "quicker way to scale and to profitability" since mass adoption of AVs and commercialization of robotaxis fleets are further out. This is consistent with our previous observations that ADAS is gaining momentum as automakers look to differentiate their vehicles from competition, and bolster margins via software delivery. ADAS is already the here and now, and passenger vehicles adopting advanced Level 2, or "L2+", features are likely to far exceed Level 4 and above within the foreseeable future, making a positive tailwind for Luminar.
Automakers' increasing urgency to bolster profit margins amid the persistent inflationary environment and looming consumer weakness will likely buoy demand for auto software, and inadvertently, complementary hardware, like Luminar's lidar systems. Specifically, low cost lidar solutions like those offered by Luminar will be most attractive. Luminar is currently leveraging its vertically integrated business model to further reduce the BOM for current lidar systems from $500 to $100 over the longer-term, which would be critical for both its profitability (the ASP for Luminar lidar systems is currently in the $1,000 range ) and enabling demand for its offerings amid increasing competition.
Our ASP initially for just the hardware is going to be a $1,000 plus or minus.
We custom designed our LIDAR, didn't buy off the shelf parts. And so our bill of material, think about it as the material cost of our LIDAR, our target for our first full year series production is in that $500 range. And at a $1,000 ASP, that creates a viable business model for OEMs to start putting our LIDAR technology on their vehicles. Our goal over time is to bring that down even more and to take our BOM from a $500 target to $100 target.
Source: Luminar Technologies' Management on RBC Capital Markets AV Panel Transcript
The company's next-generation "Iris" lidar system is already used by many reputable OEMs to facilitate their respective ADAS features, including Polestar ( PSNY ), which also provides validation to its technologies' competency:
Luminar's Iris LIDAR sensor is currently one of the best in class, offering long-range detection of objects that are more than 250 meters away, with high resolution to support application across passenger vehicles, commercial vehicles, and robotaxis. The sensors have also been designed to offer optimal scalability for customers, while meeting commercial viability for automotive applications through level 5 autonomy, which does not require any human intervention once approved by regulators.
Source: " Luminar Technologies Stock Forecast: Has the Price Hit a Bottom? "
Implications of Growing AV Consolidation
Competition is growing across the lidar hardware / software supply chain, with rivals like Velodyne ( VLDR ), Cepton ( CPTN ), and Innoviz ( INVZ ) also looking to capitalize on the "here and now" opportunities enabled by surging ADAS demand, while putting longer-term autonomy mobility aspirations in the back seat. Yet, as opposed to Aurora, we view Luminar in a prime position as a consolidation within its field. The company has already made a series of high profile acquisitions in recent years, including Open Photonics, Black Forest Engineering, OptoGration , and Freedom Photonics , which were all critical to Luminar's graduation from its legacy "Hydra" lidar system to the more cost-efficient and higher performance Iris lidar system today. The company also benefits from a full-stack turnkey solution that makes it a positive appeal to auto OEMs looking for all-in-one ADAS solutions for in-vehicle integration:
In addition to its core hardware offering, the Iris sensors, Luminar also offers complementary software to provide OEM partners with a "turn-key autonomous solution to accelerate widespread adoption at series production":
Perception Software : Luminar works alongside its OEM partners to ensure its LIDAR systems deliver "full vehicle system capabilities". This requires configuration of the company's proprietary perception software used in transforming data gathered by the LIDAR (e.g., object range, speed detection, real-time mapping, etc.) into actionable information for the vehicle.
Core Sensor Software : Core sensor software is built into Luminar's LIDAR systems, and further configured to capture OEM requirements for vehicle integration and control. Core sensor software is primarily responsible for "enriching sensor data stream before perception processing", with core features such as "automatic sensor discovery to expedite system start-up time, extrinsic calibration to automate multi-LIDAR geometrical alignment, and horizon tracking to automate region-of-interest scanning".
Sentinel : Sentinel, introduced in March 2021, represents Luminar's full-stack hardware-software offering that combines Iris sensors with its proprietary perception and core sensor software. Two key aspects of the technology are "Highway Autonomy" and "Proactive Safety" to enable safe and convenient autonomous driving/ADAS capabilities on highways, as well as proactive "accident avoidance" monitoring at all times. Sentinel is currently on track for beta release by the end of the year to existing customers including Volvo and SAIC, with continued updates delivered over-the-air.
Source: "Luminar Technologies Stock Forecast: Has the Price Hit a Bottom?"
The combination of Luminar's ability to stay agile with its full-stack hardware-software offerings in terms of serving both the ADAS market today and AV market over the longer-term, paired with the proven scalability of its technology corroborate further market share gains for the company over coming years. Combined with its years of experience in acquiring and successfully integrating constituents across the lidar supply chain, Luminar will likely remain key provider of ADAS / AV solutions over the longer-term and benefit from continued market share gains.
Implications for Aurora Innovation
Sentiment: Negative
Admittedly, sentiment for Aurora has fallen drastically since our initial coverage on the stock. At the time, much of the optimism were generated by the company's reputable backers and partners, which count Uber ( UBER ) and Toyota ( TM ) - as well as the practical use cases applicable to sprawling demand across the trucking industry, which differs from the passenger ride-hailing robotaxis market.
For one, previous investors' confidence buoyed by the reputation of a start-up's backers have largely waned amid this year's market rout. Many SPAC mergers across the AV supply chain, including those with star-studded backers, have found themselves in a bloodbath this year, especially as investors' aversion growth on pre-revenue and unprofitable businesses amid the risk-off market climate. And more specific to the AV industry, the abrupt shutdown of Argo AI and Apple's recent decision to adopt a more "pragmatic approach" to its self-driving vehicle ambitions have also sent shockwaves across the supply chain, underscoring the fragility of confidence in technologies with materialization timelines - let alone cash flows - that remain the furthest out from realization.
Second, optimism across fleet operators for autonomous technology is also shifting to a broader preference for EVs and ADAS instead, given the immediate ability to realize and capture the better economies (e.g., lower costs of ownership with EV's immediate effectiveness of ADAS technologies, etc.). Many fleet partners have likely reduced exposure to unnecessary costs - such as speculative AV technology tests and/or pilot programs - to protect their bottom lines ahead of the looming economic downturn.
Together, this has created significant headwinds for nascent technology start-ups like Aurora. The company has already indicated that even under the most conservative stance, it would only have sufficient capital to extend its cash runway to the middle of 2024 - the anticipated timeline in which it expects to deliver "scalable" driverless truck technology for commercial deployment. Aurora management has also recently cited challenges working with certain manufacturers, which alludes back to our speculation that AV technology testing and pilot programs are currently not a top priority for automakers as the cost of capital surges while the broader macroeconomic backdrop unravels.
Implications of Growing AV Consolidation
Considering Aurora's autonomous driving technology for truck application is in late testing phase and has proven viability to some extent, pending further regulatory refinement in the AV space for commercial deployment, and the current risk-off market climate that has crimped its valuation, the company makes a prime candidate for consolidation. This is corroborated by Aurora CEO, Chris Urmson's recent response when asked about the company's outlook on deteriorating market conditions, which included consideration of a possible sale to big tech names involved in the development of self-driving vehicles and/or next-generation technologies, including Apple or Microsoft ( MSFT ), or other "tier 1" auto OEMs.
The company has also been mulling aggressive cost cuts via "an attrition rate as high as 10% that targets underperformers", as well as capital raising efforts to bolster its balance sheet needed to support the continuation of its capital-intensive endeavor in making the commercialization of autonomous trucking fleets happen. The "unconventional" capital raising efforts currently considered by Urmson and Aurora's management team include a potential privatization of the company, spinning off subsidiaries, and/or selling assets and pursuing a financing round through public markets, which again, point to the growing drumbeat for consolidation within the industry:
We don't expect that a conventional fundraising opportunity of sufficient scale to add a year of runway to the company will present itself over the next six months…While we continue to have ample runway, it's important that we do what we can to extend that runway.
Aurora could take the company private if it can find a partner who would anchor a $1.5 billion funding round…Aurora could also potentially sell its lidar business for $500 million to $1 billion.
Source: Bloomberg
Alternatively, the company could take a different route and consolidate smaller players across the supply chain instead. Specifically, Aurora has tuck-in acquisitions valued at the $150 million to $300 million range to reduce the burden of its current development costs. However, considering the rising cost of capital, and growing uncertainties over the timeline of commercial deployment of its technologies, it is more likely than not for Aurora to become a candidate for consolidation instead.
Implications for MicroVision
Sentiment: Negative
As a lidar-focused company, MicroVision benefits from a similar shield as Luminar from risks of the back-tracking transition from AV back to ADAS. However, MicroVision struggles from an operational aspect that hampers it from capitalizing on related opportunities stemming from growing ADAS demand. The company has historically run a laser-beam scanning technology business. The legacy technology is most notably known for its alleged use in Microsoft's HoloLens. Yet, MicroVision's operations has never turned a profit. Its strategic pivot to developing automotive application lidar systems has also yet to gain momentum. Although the product is priced at under $1,000 per unit and is supported on Nvidia's ( NVDA ) autonomous driving software, which is commonly used by auto OEMs to support their respective ADAS features, MicroVision's lidar system is far from being as attractive of an offering to auto OEMs as those by more reputable firms like Luminar.
This goes back to the fact that Level 2 and L2+ ADAS lidar demand and application is rather cost-driven than performance-driven:
We believe the debate around value-add of a LiDAR in a sensing suite has been long settled, with decisions to exclude LiDARs largely a cost-based decision rather than performance…However, debates remain rife in relation to the winning technology approach in LiDAR, the differentiation between players and the recipe for success as automakers pursue a multi-pronged strategy of preparing some vehicle platforms for L2 functionalities while some OEMs look to leap frog to L3+ with some other developments.
Source: JP Morgan
This is further corroborated by mixed views across the automotive industry on the role that lidar systems play in enabling ADAS and AV features. This includes Tesla's longstanding views that "self-driving cars do not need lidar", with its ADAS and AV solutions relying solely on a suite of cameras to enable a " vision-based " system. Today, MicroVision's lidar system - including the latest " MAVIN DR " - may not be trailing too far behind its peers in terms of proficiency, offering long-range high-resolution detection of up to 250-meters. However, this technological efficiency is currently not required for powering Level 2 or L2+ applications, making it less attractive than less costly offerings by peers, though could potentially benefit from greater demand and scale later in the decade with Level 3 adoption potentially gaining momentum. For now, the company will continue to play a lesser role in real-world auto applications and stay more prominent within test and sampling environments:
So the first is revenue from our new MAVIN products. So we have made some sample sales, so we expect to recognize revenue in this quarter. However, as I mentioned, this won't be a significant number.
As we ramp up in 2023 our engagements, we would have meaningful streams of revenue coming from the sale of samples. The second stream would be non-recurring engineering projects with OEMs, where we would -- the OEMs we would be working on would have customizations or whatever they need for the product to be included in their fleets.
And obviously, direct sample sales that we would be accelerating as our MAVIN product is Class 1 certified and we can expand the streams into research labs, universities or whoever is interested in buying our product. So this would be the three streams of revenue from the automotive LiDAR that we expect in Q4 and next year.
Implications of Growing AV Consolidation
For now, MicroVision remains a candidate for being consolidated into a larger lidar system company or auto OEM. This is consistent with the company's longstanding interest in selling the company to drive greater consolidation synergies. However, it has yet to receive any viable offers, despite its valuation falling to attractive levels amid this year's market sell-off.
While MicroVision's successful development of its first set of low-, medium- and long-range automotive lidar sensors gives the company potential to turn around for the better, uncertainties remain on the viability of which, especially with its products primarily being used and sold in sampling environments at the moment. Until additional synergies are achieved with strategic initiatives, such as a merger or strategic partnership of the company with an automotive OEM or tier-1 manufacturer, our outlook on the stock remains neutral.
The Bottom Line
Out of Luminar, Aurora and MicroVision, Luminar checks almost every box that downstream auto OEMs are currently looking for when it comes to the integration of next-generation autonomous mobility technologies. The cost competitiveness of Luminar's lidar systems, and full-stack complementary software solutions drive greater appeal to auto OEMs in the current industry climate where determining the use of said suite of sensors is more so a "cost-based decision rather than performance".
With the aim to incorporate innovative features like ADAS to bolster profit margins within the increasingly competitive and cost-intensive industry, auto OEMs continue to favor solutions like those offered by Luminar which can help achieve favorable profit margins, without compromising on the versatility of its technology's advancement to full autonomous over the longer-term. And paired with Luminar's relatively robust capital structure when compared to rivals like Aurora and MicroVision, it is likely to remain a share gainer in the nascent, yet rapidly consolidating, industry.
For further details see:
Luminar, Aurora, MicroVision: Who Wins In The AV-ADAS Tug-Of-War?