OUST - Ouster: A Contentious Stock In The Lidar Market

2023-09-14 11:26:22 ET

Summary

• Ouster, Inc.'s focus on cost-cutting amid impressive revenue growth rates raises concerns about its long-term sustainability.
• The increase in sensor prices, coupled with only a marginal rise in sensor shipments, indicates potential customer interest challenges.
• Ouster's low GAAP gross margin and substantial stock-based compensation present viability questions for its business model.

Investment Thesis

Ouster, Inc. ( OUST ) seeks to position itself at the forefront of the lidar market, servicing the autonomy revolution, by bringing lidar technology to various industries to make them more efficient.

Recent developments see Ouster focus on cutting out costs from operations. In fact, I believe that's where the real battleground for this stock is found, so let's jump to it.

Why Ouster? Why Now?

Ouster is a provider of lidar sensors used in various industries, including automotive, industrial, robotics, and smart infrastructure. Their product portfolio includes high-resolution scanning and solid-state digital lidar sensors, as well as software solutions. Ouster's digital lidar sensors are known for their high performance and cost-effectiveness, making them a central player in the development of autonomous technologies.

The company serves four primary target markets:

• Industrial : Ouster's lidar sensors are used to enhance safety and automate operations across the global supply chain, including material handling vehicles in ports and warehouses, off-highway vehicles in mining and farming, and manufacturing equipment in factories.

• Smart Infrastructure : They provide lidar technology to cities, both in the public and private sectors, to improve safety and efficiency in applications such as traffic lights, warning systems, and smart city initiatives. Lidar also enhances security systems by improving intrusion detection and tracking capabilities.

• Automotive : Ouster collaborates with the automotive industry to support the growing demand for advanced safety and autonomy features powered by lidar technology.

• Robotics : Ouster's lidar sensors play a role in the automation of tasks that are redundant or dangerous for humans.

Ouster aims to make the physical world safer and more efficient.

Their lidar technology can be integrated into various applications, including robots, vehicles (cars, trucks, drones), factories, buildings, traffic systems, retail stores, stadiums, docks, and airport terminals.

While undoubtedly, Ouster's narrative is compelling and is one that is seeking to disrupt a massive total addressable market, that's not really the issue that's weighing down the stock, so let's press ahead.

Revenue Growth Rates Are Sizzling Strong

Now we start to get to the crux of the matter. Ouster's growth rates look impressive, right? Well, the first consideration is that Ouster Acquired Velodyne, and this has obfuscated the underlying organic growth rates.

The second consideration, which is admittedly more nuanced, is that Ouster's sensor prices increased to approximately $6,300 per sensor in Q2 2023, up from $5,700 per sensor in Q1 2023. As an investor, I'm very much of the Amazon ( AMZN ) school of thought, that relying on price increases is not a sustainable formula. As Jeff Bezos says, your margin is my opportunity.

Indeed, we can see that while pricing was up significantly sequentially, sensors shipped were only up 1% y/y to over 3,000 sensors. This, to me, speaks of a weak customer interest.

I don't expect many to view this in my eyes, but I've seen this movie unfold with many companies over the years. You want to see massive customer adoption, reflecting a company's strong value proposition. Not an overreliance on ''temporary'' price increases.

The Bearish Concern

Ouster's GAAP gross margin was 1% in Q2, 2023. The bulk of the discrepancy between its GAAP and non-GAAP margins is stock-based compensation. There are other elements too, such as amortization of intangibles, but for the most part, it is stock-based compensation. Even though its stock-based compensation figure is down from Q1, it's still elevated.

To put it another way, Ouster's stock-based compensation in Q2 2023 reached approximately $17 million, to drive $19 million worth of revenues? I don't believe that's a viable business model.

For their part, Ouster's management notes that it is taking steps to reduce expenditures and is targeting over $110 million in cost savings exiting the fourth quarter of 2023.

The Bottom Line

I'm uncertain about Ouster at this moment. The company positions itself as a leader in the lidar market, aiming to bring this technology to various industries for efficiency. However, recent developments focus on cost-cutting measures, which seem to be a significant battleground for the company.

Their growth rates are impressive, but the acquisition of Velodyne has blurred the organic growth picture. Moreover, while sensor prices have increased, the modest rise in sensor shipments suggests tepid customer interest.

Ouster, Inc.'s low GAAP gross margin and substantial stock-based compensation raise questions about its business model's viability despite efforts to reduce costs. I'm uncertain about how this narrative will unfold, given these concerns.

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