LAZR - Luminar Technologies: Buy This LiDAR Stock When Others Are Fearful

2023-12-13 00:02:57 ET

Summary

• Luminar Technologies, founded by Austin Russell, aims to save 100 million lives by providing LiDAR software for better driving safety.
• The Company has an order book of $3.4 billion and plans to launch its LiDAR software, Iris, in partnership with Volvo by the end of Q4 2023.
• Despite negative free cash flow, LAZR has a strong balance sheet and the potential to become profitable within the next 2 years.

Luminar Technologies ( LAZR ) is one of my favorite LiDAR stock plays because the company was founded by Austin Russell who made history as the world's youngest billionaire in 2020.

At just age 25, Russell took Luminar public after founding the company at age 17. He dropped out of Stanford University at age 18 to run Luminar full-time after receiving a $100,000 grant from The Thiel Fellowship in 2013.

Fast forward to today, Luminar remains an extremely high-upside stock with lots of potential even though LAZR shares are down 50% YTD.

You would have done much better investing in the Invesco NASDAQ 100 during the same period.

LiDAR technology isn't mainstream yet but several companies are fighting for market share in a fast-growing industry that could transform the way we drive forever.

Luminar Q3 2023 Business Update

Luminar's goal is to save 100 million lives over the next 100 years by providing LiDAR software to help drivers make better decisions on the road.

The company described its ambitious goal in complete detail during Luminar Day 2023, which is available to watch on YouTube.

The company has an order book of $3.4 billion and will launch its LiDAR software, Iris, in partnership with Volvo and its EX90 vehicle by the end of Q4 2023. The Volvo deal could expand up to 250,000 units at full capacity, which is currently being installed at the Volvo US plant in Charleston, South Carolina.

The Volvo partnership should add a tremendous amount of revenue and help put an end to the company's massive negative free cash flow problem.

Luminar plans to extend the same technology with several other clients including:

• Mercedes Benz
• TPK
• Polestar
• Nissan

The company is also working with Mobileye and Nvidia after being chosen by both companies because of Luminar's advanced LiDAR technology.

In Q3 2023, Luminar made several strides toward profitability by achieving an improvement in revenue, free cash flow, and gross margins.

Revenue hit $17 million (Up 31% YoY) while net losses reached $134 million (-$0.34 per share). The company has an aggressive goal to improve free cash flow by 50% in the upcoming Q4, which was -$60.8 million in the quarter.

Negative free cash flow is largely responsible for Luminar's continuous decline in share price over the last several quarters. Luminar's 2 biggest quarterly expenses are R&D and marketing, which cost $62 million and $12 million in Q3 2023. However, I believe the company may hit an inflection point in Q4 once revenue begins flowing in from the Volvo Iris launch.

Luminar finished Q3 with $320 million cash on hand and isn't in any danger of going bankrupt. Luminar CFO Tom Fenimore mentioned during the company's Q3 2023 earnings call that Luminar has plenty of cash to stay in business and possesses a stronger balance sheet than any other publicly traded LiDAR company.

Cash on Hand for Publicly Traded LiDAR Stocks As of Q3 2023

Luminar has enough cash to last until 2025 even if cash burn remains steady.

He believes Luminar could become profitable within the next 2 years and should experience a surge in revenue and earnings growth if the company executes.

Luminar's Impressive Order Book and Long-Term Goals

Owning a $3.4 billion order book is no easy feat and shows just how much demand there is for Luminar's LiDAR technology. Luminar CEO Austin Russell also added in the Q3 2023 shareholder update that the company could add another $1 billion to its order book by the end of 2023.

When analyzing small-cap growth stocks, I'm always looking for passionate CEOs who want to solve a big problem and return value to shareholders.

Founder-led companies tend to outperform and I find it fascinating that Austin Russell wants to change the world even though he's already extremely wealthy at such a young age.

He reminds me of past young CEOs like Mark Zuckerberg and Bill Gates who achieved extraordinary wealth at a very young age yet remained focused on their long-term goals.

Investing alongside Austin Russell could pay off big if Luminar grows into a large-cap tech giant in the future.

However, it won't be an easy journey for Luminar because the company has several competitors in the LiDAR industry:

• Ouster, Inc.
• AEye, Inc.
• Innoviz Technologies, Ltd.

Luminar has the largest market cap and strong balance sheet out of the 5 above competitors. Let's take a look at the P/S ratio of these companies:

P/S Ratios of Publicly Traded LiDAR Stocks

Ouster is the best pick of the bunch in terms of P/S ratio but has a market cap of just 1/4 the size of Luminar. Luminar also has more cash on hand ($320 million) compared to Ouster ($202 million) as of Q3 2023.

When it comes to startups in disruptive fields, I tend to favor the companies with the most cash on hand.

Risk Factors

• Cash Burn : Right now, Luminar looks like a great stock to buy but the issue is ongoing cash burn and negative free cash flow. Small-cap stocks that lose money have been crushed in 2023 and that trend may continue well into 2024 if interest rates remain elevated. Management seems optimistic but needs to address the $60 million quarterly negative FCF or LAZR stock may dip even further below $2.
• Ongoing Competition : There are several key players in the LiDAR industry plus Tesla's FSD technology could take market share away from Luminar and its competitors. All of these companies should benefit from the race to smart driving technology but it's not clear if Luminar will always lead the group in terms of market cap.
• Change in Management : I'm thrilled that Austin Russell continues to lead Luminar but would proceed with caution if he stepped down from his role as CEO. I'm probably going to sell my entire stake and look elsewhere for ROI when that date happens.

My Gameplan for LAZR Stock

LAZR stock under $3 is a fantastic deal in my opinion because the company checks off all my boxes in terms of sound management, strong revenue growth, and #1 player in a new, disruptive industry.

LAZR trades at a $1 billion market cap, which makes it attractive enough for me to start building a rather large long-term position.

I'll probably stick to LAZR shares and may dabble a bit into some call options if the company becomes profitable in the next 2 years.

LiDAR is one of those hypergrowth industries that hasn't been discovered by most investors yet so my advice is to be patient. Don't expect massive gains until the masses figure out how powerful LiDAR technology will become as we transition to electric vehicles.

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