LIDR - Ouster: Positioned To Be A Leader In A LiDAR Revolution

Summary

• Ouster's eminent combination with Velodyne should unlock new value and greater chance of long-term success for the company.
• The stock could deliver strong returns if all goes well in the next 3-5 years with the growing adoption of LIDAR & their providing focus on cost driven solutions.
• Competition risks from peers as well as radar technology make the stock a risky investment but Ouster is our favorite name in this speculative sector.

Ouster Being Overlooked As The LIDAR Leader They Are Likely To Become Following Upcoming Merger

Ouster Inc. ( OUST ) is an NYSE publicly-traded company that designs and manufactures high-definition LiDAR products. Since our last bullish analysis on the stock, the price has been cut by approximately half. The company's stock is currently trading at a discount to its peers from a Price to book perspective, which we believe is unwarranted given the company's strong competitive positioning and industry-leading potential. In this report, we will outline our case for why we believe Ouster's stock is a speculative buy. Ouster, as you likely know, is a leading provider of high-definition LiDAR sensors. The company has a strong competitive position in the market, with a differentiated product offering and a robust growth strategy focused upon diversification. We believe the company's stock is a buy for the following reasons:

1. Ouster has a strong position in the LIDAR market which will only be bolstered by the merger with Velodyne ( VLDR ) ( Figure 1 ) - Ouster Inc. has developed a unique approach to lidar technology that enables it to offer high-resolution sensors at a much lower cost than its competitors. This gives the company a significant advantage in a market where cost is a major factor in determining success

2. The company's stock is currently trading at a significant discount to its peers and is expected to grow at a strong clip over the next few years

3. The company is well-positioned to benefit from the shift to autonomous vehicles and the stock price decline is oversold in our view - strong partnerships continue to form and the improving the stock's long-term stance

4. Experienced Leadership: The company's leadership team has now grown & provides a wealth of experience in the technology and lidar industries, providing a solid foundation for continued growth and success. This experience also helps to ensure that Ouster Inc. stays ahead of the competition in terms of product development and market positioning.

Figure 1. The merger between OUST & VLDR is complimentary as it brings in strengths where each business had weakness

Ouster Inc. trades as if the stock is heading on a path straight for bankruptcy. Before the Velodyne merger, this looked like a growing possibility. After the merger, we see continued viability in Ouster and the potential to again be one of the most competitive names in one of the most promising up-and-coming industries. The company's products are based on its micro-electro-mechanical ("MEMS") platform, which enables it to offer durable sensors with superior performance at a lower cost than its competitors. This along with the incoming suite of Velodyne software will create an unmatched powerhouse under one roof. The stock has been on a downward spiral of late as aforementioned, dipping from $2 to below a dollar on fairly muted volume. The dip surprisingly comes alongside a number of positive catalysts, including the company's announced merger with Velodyne LiDAR , a leading provider of LIDAR sensors, cost-saving plans , and the continuation of forming strategic agreements . Despite the negative sentiment, we believe the stock is still undervalued and positively positioned. The company is trading at a significant discount to its peers on a price-to-book basis as well as from a forward-looking earnings & revenue standpoint, and we believe the market is underestimating the potential of the Ouster-Velodyne combination that is likely to come.

Forward-Looking Valuation

Ouster's current stock price is around $1.36 per share, with a market capitalization of ~$250 million. The company went public on October 6, 2020, at a price of $12.00 per share. Since its IPO, Ouster's stock has traded in at as low as $0.76 per share. The stock is down significantly from its IPO price but has begun to turn things around in our view unlocking potential for strong future value and momentum. Ouster is expected to begin breaking even around 2026 ( Figure 2 ) and continue to grow at a strong clip potentially breaking $1B in revenues by 2028. Obviously, this consensus could drastically change both upwards or downwards with the rate of adoption of LIDAR, but we feel these are fairly good estimates with the new combination of two of the industry's young giants.

Figure 2. Analysts see sometime between late 2025 & early 2027 as being the turning point for Ouster

With around $180 million in cash expected to be available (assuming the merger is completed successfully) upon closing the deal in 2H of 2023 Ouster should come close to having the cash they need to prosper into profitability. We believe a little more cash would make investors much more comfortable most favorably through a partnership with a larger entity (Velodyne has received investments from Amazon in the past). Ouster is well-positioned to continue its rapid growth for years into the future and just needs a shoulder to lean on to bring this new duo through to the next generation of sensors. Ouster brings the expertise in diversification & production margins while Velodyne brings experience and a suite of customers & software to the table.

Best case scenario, the stock reaches profitability by the estimated 2026 timeline with little to no additional funding needed, at which point it would need to trade around 5x higher than current prices to be fairly valued (~25x P/E, ~ 1.5x P/S based off 2026 estimates ) this would generate a return of approximately 140% annually for long-term high-risk investors. We give a rough likelihood of this being the case of ~12.5% with the greatest likelihood being further funding is needed, the stock is diluted, and the timeline is drug out another 1 to 2 years on top of the initial planned 3 to reach profitability. This case which would generate somewhere between 100-500% returns over the next 3-5 years we believe has an approximately 75% chance of occurring which would mean somewhere between 20-140% annual returns for long-term investors. Lastly, we believe there is a decent chance (~12.5%) that the company could face bankruptcy or significant dilution/cheap buyout due to competition resulting in minimal gains or total losses.

Investment Risks

As discussed, Ouster is a young company with a lot of upside potential. However, there are also a few risks to consider before investing in their stock as downside risk is heightened for them as well. Firstly, the company is not yet profitable, which means there is a decent chance that it very well could go bankrupt in the next 2-4 years. Secondly, Ouster is highly dependent on a small number of customers (yet growing), which could put it in a difficult position if those customers were to leave or pursue other technology such as radar, or competing LIDAR names. Overall, Ouster is a risky investment, but we believe further downside at these prices in the mid-term is limited. If the company can overcome these aforementioned challenges, it could be very successful in the future for the stock. If these challenges are not overcome Ouster's stock could drag for half a decade before potentially gaining ground or even worse go under.

The LiDAR market is still relatively new and for the most part untested at scale. There are concerns that the market may not grow as quickly as some investors expect. Ouster is not the only player in the LiDAR market, there are several well-funded competitors, which could make it difficult for Ouster to gain market share. Investors should carefully consider these risks before investing in Ouster's stock. The company currently has very limited debt and a nice cash runway for the next 2-3 years so this should be heavily monitored but is not a major short-term risk. Ouster should be taken as a very small portion of one's portfolio (less than 2%) as risk is significant (expect the stock to fall with cash burn, ~-33% annually, until news of a light at the end of the tunnel breaks) and the blockbuster gains that the stock has potential to create may take time to play out.

Comprehensive Conclusion

Ouster Inc. is a buy at its current, discounted prices for high-risk speculative investors looking for a strong bet on small-cap technology. Ouster's cutting-edge tech, which is still in its early stages of adoption, puts it in a strong position to capitalize on the rapidly growing lidar market. Additionally, the company's stronger-than-average financials and recent partnerships with leading companies in the automotive and robotics industries make it a solid a fair valued investment option for 2023-2026. In conclusion, Ouster Inc. has as much as 500% 3-4 year upside potential and is one of our favorite Lidar picks and small-cap investment options of 2023. Ouster has a strong product lineup, a large, growing order book, and exciting growth prospects with their expected combination with Velodyne's suite of software & hardware . Furthermore, the company's valuation is attractive at current prices from a price to book ratio standpoint as well as forward earnings and revenue projections. As such, we believe that Ouster is a compelling investment option for speculative long-term growth. Investors should be aware that an investment in Ouster could result in significant if not total losses of investment in a worst-case scenario (which we assign just above a 10% chance of occurrence within the next 3-5 years).

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